Who doesn’t love a winner? Therein lies the problem for fund investors.
The “winner” I’m referring to in this case is the fund that tops the market. In general, winning sparks interest, with outperformers attracting inflows from investors seeking a piece of the action.
That doesn’t have to be a problem, per se. If the strategy is scalable, then the manager can deploy the new money without much trouble. But if the surge in demand inundates the fund or occurs when its investments are getting overheated, it can be concerning. What I was interested in was how often this happens and how these funds’ performance compared before and after they saw the influx of capital.
I conducted a simple study compiling the rolling 12-month organic growth rate (that is, flows over a year divided by net assets at the start of that year) of all US mutual funds and exchange-traded funds from Aug. 1, 1998, through July 31, 2025. I focused on funds that had no less than $500 million in net assets at the beginning of the period and that notched a 200%-plus OGR in a year. This ensured every fund had seen at least $1 billion in net inflows over the period. There were 568 funds that met these specifications.
Next, I pulled these 568 funds’ rolling 36-month returns for this 27-year period, with the first rolling period ending on July 31, 2001, and the last on July 31, 2025. Then I compared those returns with the returns of a broad benchmark that corresponded to the fund’s type, such as the S&P 500 (US stock funds), the Bloomberg US Aggregate Bond Index (taxable bond funds), and so forth. (See the Appendix for the full list of indexes.) This yielded rolling 36-month excess return measurements for each fund.
Not surprisingly, I found these hyper-inflow funds were likelier to have outperformed than lagged their broad benchmark, by a roughly two-to-one margin. (Some that saw huge inflows but lagged were special cases, like funds added as a holding to a fund of funds, explaining the surge of assets at a time when returns weren’t necessarily stellar.) All told, the average rolling 36-month excess return was around 3.6% per year, meaning these funds typically had their growth spurt when they were handily outperforming. Here’s a time-lapse of all of the rolling periods.
Of these funds, I focused on those that had beaten the broader market over the period they saw the asset surge, comparing their subsequent three-year excess returns to their excess returns in the prior three-year period. At first glance, the results didn’t look that bad considering returns’ tendency to revert to the mean, with these formerly winning funds subsequently lagging only about 60% of the time.
But that’s propped up a bit by the strong results of value-oriented stock funds, which saw a big surge of inflows in the early 2000s amid a rotation away from reeling growth funds. Because the value rally went on for some time, it meant that some of these funds kept their winning streak going even after hoovering up assets during and after the internet bust.
In more recent decades, though, reversals have been more frequent and painful, which is apparent from the time-lapse of these funds’ average subsequent rolling 36-month excess returns. As the chart shows, the average subsequent excess return gradually drifted lower, especially in recent years.
For instance, five funds outperformed their broad market benchmarks by at least 5 percentage points per year over the three years ended Aug. 31, 2021—ARK Autonomous Technology & Robotics ETF ARKQ (15.0% annual excess return), ARK Genomic Revolution ETF ARKG (20.0%), Global X Lithium & Battery Tech ETF LIT (22.7%), Hartford Schroders International Stock SCIEX (6%), and iShares Global Clean Energy ETF ICLN (22.6%)—while reaping huge inflows. Four of those five massively underperformed over the subsequent three years.
Last, relative performance almost always deteriorated after the torrent of flows arrived. For instance, a fund that had formerly outperformed its broad benchmark in the prior period either did so by a lesser margin subsequently or lagged altogether, and so forth. That’s apparent in the chart, which shows how the change in average excess returns (that is, the average of the difference between prior three-year period excess returns and subsequent three-year period excess returns) was almost always negative.
For a list of funds that have been most popular with investors recently, see the Appendix.
Takeaways for Investors
There’s nothing wrong with a fund catching on with investors. But when the money comes in fast and furious, it’s worth digging in to try to understand what’s driving it, especially if that popularity comes on the heels of strong returns.
At the very least, it makes sense to temper expectations of future performance, as in most instances we found that excess returns against a broad market index eroded after the big influx of assets. But it is also worth trying to ascertain why the fund might have become the magnet for flows it has in the first place.
For instance, if it has streaked to outperformance by plying a very aggressive strategy in a market climate that has rewarded such boldness, a question to ask is how repeatable that is and what the consequences might be if tailwinds become headwinds.
Or could it be that it has stood out to other investors because it’s fundamentally different from the broad market index in ways that don’t necessarily advance your goals? Take, for instance, a global stock fund that leans much more heavily on US stocks or hedges its foreign-currency exposure in ways that can alternately help or hinder performance. Or a narrower sector or thematic fund that overlaps with other parts of your portfolio or courts undue risk.
In other words, popularity often doesn’t bode well for future performance.
Switched On
Here are other things I’m writing, reading, listening to, or watching:
- The YieldMax single-stock option-income strategies tout huge yields, but it’s smoke and mirrors; relatedly, Amy Arnott on YieldMax Ultra Option Income ETF
- Benn Eifert with a mega-takedown of covered-call ETFs
- “Be Invisible, Still as a Rock”: Some other thoughts on what influences the outcomes fund investors achieve
- Neko Case on resilience, wrestling, and songwriting with Marc Maron
- Nate Silver on poker tells and whether they translate to real life
- The Rewatchables pod takes on Peter Weir’s “Witness”
- Pure Nashville button-pushing, but I can’t resist it
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.
Appendix
We compared funds with the following broad market benchmarks:
Here is a list of funds that have notched a 200%-plus organic growth rate in at least one rolling 12-month period from Aug. 31, 2022, through July 31, 2025. Because these funds would not have had a full 36 months of subsequent performance following their year of hypergrowth, they’re excluded from the findings of the analysis above. However, given the likely interest in which funds have seen hypergrowth in recent years, they’re included below.
- YieldMax NVDA Option Income Strategy ETF
- 2x Bitcoin Strategy ETF
- Alpha Architect 1-3 Month Box ETF
- American Funds Multi-Sector Income A
- AQR Equity Market Neutral R6
- BlackRock High Equity Income Instl
- BNY Mellon Core Bond ETF
- BNY Mellon US Large Cap Core Equity ETF
- Capital Group Core Balanced ETF
- Capital Group Core Bond ETF
- Capital Group Core Plus Income ETF
- Capital Group Dividend Value ETF
- Capital Group Global Growth Equity ETF
- Capital Group Growth ETF
- Capital Group Municipal Income ETF
- Capital Group US Multi-Sector Inc ETF
- Columbia Research Enhanced Core ETF
- Dimensional Core Fixed Income ETF
- Dimensional Emerging Core Equity Mkt ETF
- Dimensional Emerging Markets Cr Eq 2 ETF
- Dimensional International Core Eq 2 ETF
- Dimensional International Cr Eq Mkt ETF
- Dimensional US High Profitability ETF
- F/m US Treasury 3 Month Bill ETF
- Federated Hermes MDT Market Neutral IS
- Fidelity Blue Chip Growth ETF
- Fidelity Enhanced Small Cap ETF
- Fidelity SAI International Qly Idx
- Fidelity SAI Long-Term Treasury Bd Idx
- Fidelity SAI US Momentum Index
- Fidelity SAI US Value Index
- First Eagle High Yield Municipal I
- First Trust Energy AlphaDEX ETF
- First Trust Materials AlphaDEX ETF
- First Trust Merger Arbitrage Cl I
- First Trust RBA Amer Indl RenaisTM ETF
- First Trust SMID Cp Rising Div Achv ETF
- FT Cboe Vest S&P 500 Dv Ast Tgt Inc ETF
- FullerThaler Behavioral Sm-Cp Gr R6
- Global X Artfcl Intlgc & Tech ETF
- Global X S&P 500 Covered Call ETF
- Hartford Dynamic Bond R6
- Invesco NASDAQ 100 ETF
- Invesco S&P 500 GARP ETF
- Invesco S&P 500 Momentum ETF
- Invesco S&P MidCap Momentum ETF
- Invesco S&P MidCap Quality ETF
- iShares 10+ Year Invmt Grd Corp Bd ETF
- iShares Flexible Income Active ETF
- iShares High Yield Systematic Bond ETF
- iShares iBonds Dec 2023 Term Tr ETF
- iShares iBonds Dec 2024 Term Tr ETF
- iShares MSCI Emerging Mkts ex China ETF
- iShares Treasury Floating Rate Bond ETF
- iShares US Equity Fac Rotation Act ETF
- iShares 0-3 Month Treasury Bond ETF
- Janus Henderson AAA CLO ETF
- Janus Henderson Mortgage-Backed Sec ETF
- JHancock U.S. Sector Rotation NAV
- JNL/Newton Equity Income A
- JPMorgan Active Growth ETF
- JPMorgan Active Value ETF
- JPMorgan Core Plus Bond ETF
- JPMorgan Equity Premium Income ETF
- JPMorgan Equity Premium Income R6
- JPMorgan Hedged Equity 2 R6
- JPMorgan Hedged Equity 3 R6
- JPMorgan Hedged Equity Ldrd Ovrly ETF
- JPMorgan Income ETF
- JPMorgan Nasdaq Equity Premium Inc ETF
- JPMorgan US Tech Leaders ETF
- JPMorgan US Quality Factor ETF
- Lord Abbett Short Duration High Yield R6
- Nationwide Fundamental All Cap Equity R6
- NEOS S&P 500 High Income ETF
- Pacer US Cash Cows 100 ETF
- Pacer US Small Cap Cash Cows 100 ETF
- PGIM Securitized Credit R6
- PIMCO Multisector Bond Active ETF
- Putnam Focused Large Cap Value ETF
- Roundhill Magnificent Seven ETF
- SPDR Bloomberg 3-12 Mth TBill ETF
- SPDR Portfolio High Yield Bond ETF
- T. Rowe Price Capital Apprec Eq ETF
- Victory Market Neutral Income I
- VictoryShares Free Cash Flow ETF
- WisdomTree Floating Rate Treasury ETF
- WisdomTree India Earnings ETF
- YieldMax COIN Option Income Strategy ETF
