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ETF Specialist

Survivorship Bias

Surviving funds can overstate a category's performance.

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Many funds that were around 20 years ago no longer exist. Not surprisingly, the funds that closed tended to have relatively poor performance. Fund companies have a habit of merging losers with better-performing funds, which allows them to keep their clients' assets and mask poor performance.

The average return for all mutual funds currently in the large-blend category was 8.9% annualized over the trailing 20 years through March 2014. While this statement is accurate, it overstates the performance of the average large-blend fund that existed 20 years ago because it excludes the performance of funds that did not survive the period; this phenomenon is known as survivorship bias. Additionally, some of the funds currently in the large-blend category may have been in a different category 20 years ago. This is called look-ahead bias. Look-ahead bias can occur when a fund's category is changed but those changes were not known at the beginning of the time period.

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.