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These 15 Funds Have Destroyed the Most Investor Wealth: Morningstar

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Amy Arnott, a portfolio strategist for Morningstar Research Services, this week followed up her recent analysis of the funds that created the most value for investors for the 10 years through 2021 by looking at the opposite end of the spectrum.

In her new blog post, Arnott notes that while the top wealth creators were all well-known names from some of the largest categories based on asset size, the wealth destroyers over the 10-year period are a “motley crew” of more specialized fund categories.

“By definition, the biggest funds will create or destroy more value in dollar terms,” Arnott wrote. “And money tends to flow to the funds that have been successful in the past, so the big generally get bigger. The converse is also true: Smaller funds with weaker returns are guaranteed to create less value, or even destroy it, in some cases.”

Arnott’s analysis showed that the worst value-destroyers by Morningstar Category are a hodgepodge of highly volatile and specialized categories. Two of those categories — energy limited partnership and commodities broad basket — have fared better so far in 2022 because of soaring energy prices and resurgent inflation.

However, the remaining categories have little investment merit. For example, the study found that trading-inverse equity funds destroyed an estimated $46.9 billion over the trailing 10-year period.

Leveraged and inverse ETFs are intended for short-term bets on market moves, not for long-term investments. Losses can compound quickly when the funds are held for long periods.

Regulators have long warned of these risks, and firms have been fined for improperly recommending these funds to clients. The debut this summer of single-stock ETFs drew widespread regulatory concerns and prompted a sweep in Massachusetts.

Yet these concentrated, risky funds occasionally rise to the top by betting against the market, Arnott said, noting that most funds that bet against U.S. stocks are up 20% or more so far in 2022. “But because market returns are positive more often than not, the long-term results haven’t been pretty.”

Her conclusion: “Investors have been far better served by the plain-vanilla fund categories that dominated the winners list, such as large-cap blend, allocation – 50% to 70% equity, and foreign large blend.”

Investors have generally also done well by investing with the biggest, most-established fund families. “Volatile and speculative categories — as well as small, unproven fund shops — on the other hand, are best avoided.”

See the gallery for the 15 funds that destroyed the most value for investors over the trailing 10-years through 2021.