Each year, as part of our annual “Mind the Gap” study, we estimate how much the average dollar invested in funds earned after accounting for the timing and magnitude of investors’ buys and sells. The difference, or “gap,” between that estimate and funds’ overall total returns represents the portion of returns investors forewent because of inopportunely timed transactions. The narrower the gap, the more successful the investors were.
As part of the study, we evaluate investor success across various dimensions, including asset class, fund type, investment approach (active versus passive), fees, volatility, and more. It’s revealing, offering a sense of which fund attributes tend to be associated with narrower or wider return gaps.
Oddballs
However, one thing we didn’t assess was how investors had fared in funds that were, for lack of a better term, oddballs. By “oddballs,” I mean funds that utilize approaches that aren’t tethered to the broad stock and bond markets. These types of funds boast high diversification potential and thus, in theory, could nicely complement one’s primary stock and bond allocations. But because they’re idiosyncratic, it’s also possible they could push investors’ buttons, nullifying whatever diversification benefits they might confer.
Given that, I decided to take a look, defining “oddballs” as all funds in the five Morningstar Categories that had the lowest average correlation to the broad global stock market and the bond market over the 10 years ended Oct. 31, 2025. Those categories—“Equity Market Neutral,” “Systematic Trend,” “Commodities Broad Basket,” “Commodities Focused,” and “Equity Precious Metals”—were home to 464 different funds as of Nov. 1, 2015.
I compiled those funds’ starting net assets ($116 billion), monthly net flows ($56 billion in total over the 120 months), and ending assets ($362 billion), as well as their monthly returns. Using that data, I estimated their aggregate dollar-weighted returns and total returns. Here’s what that picture looked like:
The average dollar invested in these funds gained around 8.7% per year over this period, while the funds earned a 9.2% annual total return, leaving a half percentage point per year gap. At first blush, that’s pretty darn good, as it would mean investors captured nearly 95.0% (that is, 8.7% divided by 9.2%) of their funds’ aggregate total returns.
So Metal
But the results varied a lot by category. Let’s start with the good: The dollar-weighted returns (12.0% per year) of “Commodities Focused” funds, the largest of which are physical precious metals funds like SPDR Gold ETF, slightly exceeded the funds’ total returns (11.6% annually), meaning the average dollar outgained the funds, thanks to well-timed transactions.
Contrast that with the “Systematic Trend” category (that is, managed-futures funds), where the average dollar lost roughly 0.4% per year over the 10 years ended Oct. 31, 2025, compared with the funds’ aggregate 2.2% annual total return. In other words, mistimed purchases and sales wiped out the funds’ modest total return and then some.
It was a similar story for the “Equity Market Neutral” (1.6% per year dollar-weighted return versus 3.2% annual total return) and “Commodities Broad Basket” (2.3% per year versus 4.8% annually) categories, where investors captured less than half the funds’ aggregate time-weighted returns. And while dollar-weighted returns were the strongest in absolute terms in the “Equity Precious Metals” category (12.9% per year), they still fell more than 4 percentage points per year shy of those funds’ overall annual total returns.
In fact, if one were to remove just the three largest physical precious metals exchange-traded funds—iShares Gold Trust, iShares Silver Trust, and SPDR S&P Gold—from the equation, the gap between these “oddball” funds’ dollar-weighted and total returns would nearly triple from the half percentage point annual shortfall mentioned earlier to more than 150 basis points per year.
A Lot of Death
Before I go any further one glaring detail is worth mentioning: Many of these funds died. To be precise, 184 of the 464 funds that were in the study at the beginning didn’t survive to the end because they were merged or liquidated away.
Because the analysis above incorporates the net assets, flows, ending assets, and monthly returns of these obsolete funds up to the month they were liquidated or merged, it had the effect of artificially narrowing the return gap. Why so? I assumed liquidated funds’ assets sat in cash and thus earned the same dollar-weighted and total return—namely, zilch–from the time they were liquidated until the end of the study period on Oct. 31, 2025. Meaning there was no return gap for that part of the study period.
Given that, I ran a version of the analysis above that excluded liquidated funds, as that would yield a sense of how wide the gaps were among funds that survived the full period.
In summary, the shortfalls widened. For instance, if you somehow had the ability to predict which funds would survive but didn’t invest in a gold or silver bullion ETF, your average dollar would have earned 5.5% per year, or more than 2 percentage points per year less than the funds’ 7.7% aggregate annual total return.
Sobering Results
Investors’ challenge in using “oddball funds” becomes even more apparent when you compare each individual fund’s dollar-weighted returns to its total returns over the 10-year period, which I’ve done in the plot below. In all, 86% of these funds had a negative gap, and about one in five funds had incurred dollar-weighted loss over the 10-year period.
Not only that, many funds had sizable shortfalls—investors in the median fund captured only around two-thirds of its total return.
Tripwires
What tripped up investors? In some cases, such as “Systematic Trend” funds, they repeatedly chased the funds’ returns to their detriment, as shown below.
In other cases, like “Equity Market Neutral” funds, they wrongfooted themselves, adding monies as performance cooled and redeeming as it heated up again.
Not only are these types of strategies unpredictable by their nature, but there can be substantial variation in how funds of the same type perform. To illustrate, here are the average rolling 12-month R-squared values (similar to correlation) of “Systematic Trend” and “Equity Market Neutral” funds compared with the return of the average fund in those peer groups. These low R-squared values indicate fund returns varied a lot within these categories.
By contrast, not surprisingly, funds and ETFs that invested in physical gold performed more-or-less identically to one another, making it largely irrelevant which particular strategy investors chose.
Takeaways
At first glance, it might not look like investors encountered too much trouble investing in “oddball” funds, as there was a narrow gap between the return of their average dollar and the funds’ aggregate total returns over the decade ended Oct. 31, 2025.
But investors’ fortunes varied quite a bit depending on whether they’d invested in three precious metals ETFs, whose dollar-weighted and total returns were similar, and other “oddballs” where the gaps were often far wider, or where the average dollar lost money. Moreover, many of these funds died, compounding the challenge of choosing correctly.
This seems to underscore a few points:
- There’s no diversification potential if you can’t live with the position
These strategies offer diversification potential in the first place because they perform so differently from traditional stocks and bonds. Therefore, if you’re considering a position, do so in a clear-eyed way, with the expectation it’ll stick out, dragging on returns at times. If you can’t handle that, don’t bother.
- Be strategic, don’t chase
The corollary to the previous point is that if you chase performance, you can probably kiss any diversification benefits goodbye, or at the very least expect your risk-adjusted returns to suffer. The poor dollar-weighed returns of “Equity Market Neutral” and “Systematic Trend” funds attest to the danger of chasing. If you’re going to take a position in one of these strategies, do so as part of a strategic allocation, with the weight dictated by a target you rebalance to on a regular basis.
- Keep it (as) simple (as possible)
Investors had more success investing in precious metals ETFs. Those ETFs differ in their simplicity–they just hold the physical metal, whereas other types of “oddball” strategies employ a bevy of techniques to generate an uncorrelated return stream. While one can debate the merit of those other approaches, it’s undeniable that they’re less straightforward and, if the data is any indication, harder for investors to assess, which can lead to inopportune buying and selling. That shouldn’t rule them out necessarily, but for many, they probably belong on the “too hard” pile.
Many of these “oddball” funds were merged or liquidated. When that happens, often following a bout of poor performance, it imposes an extra choice on investors, who must decide whether to stick with the acquiring fund or where to allocate the proceeds of a liquidation, with all of the associated complications. To avoid this, I’d opt for more established, larger vehicles from families that have been running money in that style for some time.
Switched On
Here are other things I’m saying, reading, listening to, or watching:
- Remembering Jonathan Clements
- “10 Things We Can Learn from Warren Buffett” by Dan Lefkovitz; also, the Buffett Thanksgiving letter
- One of the most craven things I’ve ever seen in the fund business; related, YieldMax declared reverse splits on 12 of its ETFs and people kind of lost it
- The Preventionist
- The Life Advice guys stumble onto a potential Curb Your Enthusiasm plotline (starts at 1 hour, 26 minute mark)
Don’t Be a Stranger
I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.