In their new paper, “Why Funds Die,” Morningstar looked at funds that have closed* in recent years to identify patterns or consistent characteristics.
They looked at U.S. mutual funds and ETFs that launched between 2005 and 2020 and noted several consistent characteristics.
While there was a significant rise in fund closures in 2008-2009 coinciding with the global financial crisis, examination of the fund closures overall in that 15-year period identified five consistent characteristics:
- Short lives
- Low assets under management
- High fees
- Poor performance
- Ties to certain fund providers
Identifying these characteristics can help investors determine which funds to avoid, and suggest to fund companies which characteristics they should keep any eye out for.
*Morningstar labeled funds as “closed” if they ceased to exist and were either liquidated or merged into another fund.