When it comes to funds, it’s sometimes hard to separate the good deals from those that aren’t remotely worth it.
After all, there are thousands of options available in all shapes and sizes. Some funds span the whole market, others home in on narrow segments or themes. There are strategies that make income their top priority, while others aim for total return. Heck, there are even strategies that try to dial in a target return over a specified time horizon, the trajectory of markets notwithstanding.
In a lot of these instances, the selling points really boil down to attributes like convenience and peace of mind. Do you want to pay a little extra to gain certainty, remove an obstacle, or soothe your nerves? Sometimes it’s worth it, other times it’s a bad deal.
In this piece, I consider a few examples in which funds confer some convenience, automation, or certainty that can be worth paying up for, as well as some other cases—here’s looking at you, covered-call ETFs and private credit closed-end funds—where it’s not.
When It’s Worth It
- When you’re not paying extra
OK, duh. But if you don’t have to pay anything extra for whatever convenience you’re being afforded, and there’s no obvious or glaring trade-off, it’s hard to argue with it.
Probably the quintessential example of this is the free rebalancing and glide path adjustment you get in target-date funds. Our research has found that investors have generally succeeded in capturing most of these funds’ total returns because that built-in automation obviates the need for them to act on their own.
You also see something similar with total-market strategies, which eliminate the need to choose and maintain stand-alone building block positions in a portfolio. It’s a good example of six-of-one being worth more than half-a-dozen of another.
Yes, we could debate whether the glide path target-date funds follow is appropriate at various life stages, if total bond market funds sink too much into Treasuries, and so forth. But those arguments kind of miss the point: If you’re putting investors in a position where they don’t have to tinker with their holdings—by automating or lashing stand-alone positions together into a contiguous whole—then they’re far less likely to trade to their own detriment.
- When you’re paying extra but avoiding heftier costs in the process
Suppose you buy something that locks in an outcome. When you do so, you’ll pay more or forego something. For instance, with annuities, you trade your capital’s compounding potential for a guaranteed income stream. While this might be theoretically suboptimal, research has found it can encourage reluctant spenders to loosen the purse strings in retirement in ways that redound to their benefit.
When it comes to funds, maybe the most relevant recent example is buffer exchange-traded funds. These ETFs have sparked a lot of debate, as they cost more and involve financial engineering that others have decried as unnecessary.
But based on the research I’ve done, it does appear that investors—many of them unwilling or unable to live with market uncertainty—stick with these ETFs, which have largely worked as intended.
In that way, even if these investors aren’t earning as much as they technically could, they’re still avoiding potentially costly trading errors spurred by the market’s gyrations. Net-net, that seems like a good thing.
- When you’re removing frictions and gaining wider diversification
This one is debatable too, but there’s something to be said for the “easy button.”
For instance, there’s now a bevy of target-maturity and laddered ETFs that lash together dozens of bonds of similar maturity, credit quality, or other attributes. Is this sophisticated? No. Does it cost extra? It does. Can it still be worth it to an investor seeking to better diversify or advance other objectives in one fell swoop, without the headaches? Yep.
The counterfactual is a scenario where an investor is overly exposed to a given security or sector because it’s a pain to spread their assets out across many holdings. If an ETF can make that easier and mitigate risk in the process, why not?
When It’s Not Worth It
Then there are situations where I don’t think it makes a lick of sense to pay extra for convenience or certainty, either because it’s not worth the benefits or imposes unacceptable trade-offs.
- When you’re pulling forward returns, shortchanging yourself
Covered-call ETFs invest in a mix of individual stocks and options to capture some of the upside, protect a bit of the downside, and generate an attractive yield from the premium on options they sell. Investors have glommed on to them because they’re seen as less tethered to the broad stock and bond markets and throw off copious income.
While there’s something to be said for the bird-in-the-hand, the leading covered-call ETFs have struggled to outdo a simple mix of stocks and cash. To illustrate, here are the trailing Sharpe Ratios of the 10 largest covered-call ETFs by net assets versus a hypothetical portfolio holding two-thirds in stocks and one-third in cash.
(Top 10 covered-call ETFs included the following: Global X S&P 500 Covered Call, Global X Nasdaq 100 Covered Call, Amplify CWP Enhanced Dividend Income, Dividend Aristocrats Target Income, JPMorgan Equity Premium Income, JPMorgan Nasdaq Equity Premium Income, Neos S&P 500 High Income, Goldman Sachs S&P 500 Premium Income, Goldman Sachs Nasdaq-100 Premium Income, Neos Nasdaq 100 High Income.)
In summary, the covered-call ETFs earned less, or were more volatile, on average than the stocks-and-cash mix over these trailing periods, explaining their inferior risk-adjusted returns.
Sure, it’s convenient to receive periodic income distributions. But there’s not much substantive difference between investing in a total return strategy—like the stocks and cash portfolio—and then periodically selling off a slice to generate an equivalent income stream. That approach should cost far less and perform about as well as a covered-call strategy and be more tax-efficient to boot.
- When you’re trading liquidity for faux stability
At least some of you have probably heard about the push to “democratize” access to private markets. In making the case for private investments, proponents often cite the strategies’ impressive returns and subdued volatility.
That pitch is irresistible to some but can be a mirage: The assets aren’t necessarily less volatile than comparable publicly traded securities. Rather, they’re marked-to-market less often, creating the appearance of stability.
To illustrate, I compiled daily return data for all unlisted private credit closed-end funds for the period bracketing the tariff announcement (March 1 to May 31, 2025). Using that data, I derived the average daily return of the highest-performing closed-end funds (that is, those having a Sharpe ratio of 2.0 or higher over the three years ended Dec. 31, 2025) and for all closed-end funds as a whole.
From there, I compared the closed-end funds’ daily returns to the daily returns of the Morningstar LSTA US Leveraged Loan Index. I chose that comparison because the index reprices loans daily to reflect changes in credit spreads, liquidity, conditions, or other factors.
In summary, the average daily returns of the highest-performing private credit closed-end funds were less than half as volatile as the index, while the average returns of all closed-end funds as a whole were a third less volatile than the benchmark.
Tellingly, the average compound return of these closed-end funds wasn’t drastically better than the index over the full three-month period. In fact, while the highest-performing funds topped the index by a narrow margin, all funds as a whole slightly lagged.
In other words, it appears that this group of funds owed its superior risk-adjusted performance during this turbulent period not mainly to standout returns, but rather a conspicuous lack of volatility. Despite that, some investors pay up handsomely for the peace of mind that a smooth series of returns apparently confers.
They risk getting a bum deal. Apart from these strategies’ lofty expenses, the biggest cost of upholding this pretense is illiquidity—once you buy in, you can’t easily cash out. That’s a feature, not a bug, for otherwise the manager would have to transact in hard-to-trade-and-value securities, puncturing the illusion of stability they’d conjured in the first place.
Switched On
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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.