Bad Idea: Following the Crowd Into the Most Popular Types of Funds

It’s tempting to invest in the most popular funds. They’ve probably had at least decent performance and the mystique that can go with that. And, by definition, they’ve drawn in other investors, meaning you’re in good company when you hit the “buy” button.

But the bestselling funds—which I’ve defined as the Morningstar Categories with the largest inflows as a percentage of their assets over a three-year period—haven’t been a good bet, on average. Their returns usually erode after that run of popularity, causing them to underperform other types of funds that hadn’t sold as well.

Popularity Comes at a Cost

To illustrate, here’s a time lapse in which I compare the most popular funds’ (as represented by category averages) past and subsequent returns, subtracting the former from the latter. When this figure is negative, it means the average returns of the bestselling fund types deteriorated, and when it’s positive, it means they improved.

The fund types that caught on with investors usually saw their performance slide in the ensuing years, as evidenced by the number of periods where the subsequent three-year average return was lower than the return in the preceding three-year period when those types of funds saw heavy demand. In fact, returns slipped in more than four fifths of the periods measured.

Investors in the most popular categories also often incurred an opportunity cost: Their funds tended to underperform other, less popular types of funds, after the period of strong inflows. This is evident in the chart below, which compares the subsequent rolling three-year returns of the most popular fund types with all other fund categories.

(For a list of the types of funds that have been most popular recently, see the Appendix to this article.)

Keep in mind, this ranks all types of funds against each other, including those with a milder risk/reward profile like fixed-income funds. But even when I ranked category averages against others of the same type—for instance, equity fund categories versus equity fund categories, and so on—the same basic pattern held. For instance, the most popular categories of equity funds saw their returns slide by around 4% per year, on average, over the 109 subsequent three-year periods that I measured.

In addition, funds in the five bestselling equity categories earned about half what other stock funds did over the subsequent three-year periods, on average.

It wasn’t any less stark when it came to sector-equity funds. For example, in the three years ended June 2016, the bestselling categories—energy limited partnership, infrastructure, equity energy, consumer defensive, and equity precious metals—notched a 19% average annual organic growth rate. But in the next three years, those categories gained only 0.4% per year on average, weighed down by the equity precious metals (negative 5.4% return per year) and energy limited partnership (negative 4.7%) categories. By contrast, the other sector-equity categories gained around 10% per year on average over that span.

Even among fixed-income funds, the most popular fund types underperformed other bond fund categories over subsequent periods, though by a narrower margin.

Conclusion

We might find strength in numbers and feel a glint of pride when we invest in the hottest-selling funds. They’re the people’s choice, after all. But the data suggests it’s not advisable to follow the crowd, as the most popular fund types have tended to see their returns erode after the fact. They’ve also underperformed comparable, if less popular, funds of the same type, meaning investors can incur a large opportunity cost in the process.

Why have the most popular types of funds not fared better? One potential explanation is fundamental: Investors purchased these funds, while others did the same, and the collective demand temporarily lifted the valuations of the underlying securities. That left those securities less room to run, or less yield, when compared with other types of holdings, thereby giving other, less popular types of funds a leg up.

But it can also be more idiosyncratic. For instance, international-stock funds have been more popular—that is, they’ve seen stronger flows as a percentage of their assets—than US stock funds, and yet, the valuations of foreign equities have generally been lower than those of US stocks. Despite that, US stock funds nonetheless galloped ahead of foreign-stock funds, propelled by the technology sector’s heady gains.

Whatever the cause, investors are well-advised to focus on more-durable attributes like portfolio fit, diversification potential, cost, and tax efficiency. Those who are more adventurously inclined might also consider tilting toward the least-popular areas, which my colleagues have found to be a fertile hunting ground as part of their long-running and successful “Buy the Unloved” strategy.

Appendix

Here are the most popular categories (that is, had the highest organic growth rate) over the three years ended March 31, 2025. The first list covers all funds, including alternatives; the other lists are broken down by major asset class.

All Funds

1. Derivative Income
2. Defined Outcome
3. Long Government
4. Digital Assets
5. Equity Market-Neutral
6. Macro Trading
7. India Equity
8. Intermediate Government
9. Ultrashort Bond
10. Intermediate Core Bond

Equity

1. India Equity
2. Japan Stock
3. Foreign Small/Mid-Value
4. Foreign Large Blend
5. Large Blend

Sector Equity

1. Communications
2. Utilities
3. Infrastructure
4. Technology
5. Industrials

Fixed Income

1. Ultrashort Bond
2. Long Government
3. Intermediate Government
4. Intermediate Core Bond
5. Global Bonds–USD Hedged

Switched On

Here are other things I’m writing, reading, listening to, or watching:

• They sure have: “Target-Date Funds Have Delivered” by Janet Yang Rohr.
• The Odd Lots podcast dives into options and volatility with Benn Eifert.
• Christine Benz and Dan Lefkovitz talk macro and tariffs with Cullen Roche on The Long View podcast.
• Rick Ferri talks to The Wall Street Journal reporter and bestselling author Greg Zuckerman about “trading and the fierce competition individuals face” on the Bogleheads on Investing podcast.
• Tadas Viskanta’s weekly roundup of the most-clicked investing and finance stories on the indispensable Abnormal Returns blog.
• The story of the Unabomber’s brother, who turned him in.
• Simplicity for the win: ESPN’s excellent “game flow” charts.

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.