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Fund Spy

Who's Behaving Better: Passive-Stock-Fund Investors or Active-Bond-Fund Investors?

The direction of investor flows and market returns--not behavior--appears largely to account for differences in dollar-weighted returns.

Key Takeaways

  • Several recent studies of investors' dollar-weighted returns have found that equity funds have recently experienced positive return gaps (that is, equity fund investors have outperformed their fund investments) while bond funds have suffered negative return gaps (that is, bond-fund investors have lagged their fund investments).
  • Similarly, passive funds have exhibited small or even positive return gaps while active funds have seen negative gaps.
  • This invites the question of whether equity- and passive-fund investors are "behaving better" than bond- and active-fund investors.
  • We find that these differences appear to stem mainly from the direction of investor flows (that is, inflows versus outflows) and market returns (that is, improving or deteriorating), rather than investor behavior.