Funds Are Facing Less Competition. That’s Made It Tougher

What if less competition stoked more competition?

Unlikely as that sounds, that dynamic might be playing out among stock and bond funds. Net-net, we’re seeing fund companies launch fewer new funds than they used to, even after accounting for a surge of new exchange-traded funds that have come to market. And that could be making things tougher for the remaining funds that are left to fight it out among themselves.

Fewer New Funds

Here’s a time lapse showing the number of new stock and bond fund inceptions by year, as well as the number of funds that were mothballed through merger or liquidation. Net-net, the industry shrank by 1,651 stock and bond funds over the past decade.

The industry has gotten grayer as a result: Whereas around one in every three funds was under three years old in the early 2000s, that share has shriveled to one in every 10 funds recently. Thus, the average fund was over 15 years old as of Nov. 30, 2025.

Newer Wasn’t Better

Newer funds have generally lagged older funds before fees. To illustrate, here are the trailing average annual prefee returns of funds in the 10 largest Morningstar Categories by assets as of Nov. 30, 2025.

Given there can be differences in the age breakdown of funds from one peer group to the next, here’s the difference in annual prefee returns between newer funds and older funds by category over all trailing periods (a negative figure indicates that newer funds underperformed older funds, and vice versa for a positive figure).

Though the results varied by trailing period and category, newer funds generally had a harder time keeping up with older funds before fees. Thus, to the extent newer funds could be considered “weaker hands,” the dearth of new fund launches could be pitting the remaining, higher-performing funds against each other.

More Sameness

Beyond that, newer funds exhibited a wider range of returns than older funds. To illustrate, here’s a look at the performance range (which I defined as the difference in monthly gross returns between funds at the 25^th and 75^th percentiles) among large-blend funds over time.

This was not unique to large blend—I found the same thing for the other most popular types of stock and bond funds, as shown in the table below, where I tally the difference in the average range of monthly prefee returns among newer and older funds since 1999.

If the funds that exhibit the greatest variation in returns shrink as a piece of the pie, it stands to reason you’ll be left with a more homogeneous group. And that’s more or less what we’re seeing in these categories, with funds performing increasingly alike before fees.

To illustrate, here’s a time lapse of the average rolling three-year R-squared of large-blend funds to the average fund (before fees), broken down by each fund’s age at the beginning of every rolling period. Overall, the average large-blend fund’s prefee returns have become more correlated with its typical peer.

Battling on Price

If funds are performing more alike, in part because fund companies are launching fewer new funds, then that could potentially make fee differences more important to funds’ relative performance.

To assess that, I ranked all stock and bond funds against their category peers based on the expense ratios they levied over the 120-month period ended Nov. 30, 2025. Using those ranks, I assigned each fund to a bucket (cheapest 10.0%, next 22.5%, middle 35.0%, next 22.5%, and priciest 10.0%) and then tracked the monthly performance of funds in those buckets over the 10-year period.

Not too surprisingly, cost differences explained relative performance, with cheaper funds beating pricier funds over the 10-year period. What’s more, the cheapest funds beat the priciest funds over every rolling three-year period that made up this span, the average margin of outperformance being nearly 200 basis points per year.

What’s striking, though, is the degree to which fee differences drove this outperformance. Specifically, I calculated the difference between the average fee of the cheapest and priciest funds over every rolling three-year period and then compared that average fee difference to the average margin of outperformance over each period, as shown below.

Fee differences routinely explained the bulk of cheaper funds’ margin of outperformance, with performance differences before fees being a marginal factor. That’s in marked contrast to what we saw over the 10 years ended Nov. 30, 2015, when it was far more common for funds to diverge before fees, making fee differences salient but not as decisive as they’ve become now.

Takeaways

The most obvious takeaway for investors is that costs matter. Fee differences appear to be explaining more of the performance margins between funds than before. As such, fees ought to rank at the very top of one’s short list of criteria to consider when choosing funds.

The corollary to this is that competition has only become more stifling for active funds. Firms are launching fewer new funds, effectively shrinking the pool of “weaker hands,” and the range of prefee returns looks to have narrowed absent the more idiosyncratic performance of newer entrants. Thus, the potential payoff of picking a winning active fund has likely shrunk before fees, which should inform how investors assess whether to index.

Switched On

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

• What’s a safe retirement spending rate? Morningstar’s “State of Retirement Income” study is back, bigger and better than ever
• Filing for second Wellington/Vanguard/Blackstone interval fund collab (with some thoughts of my own)
• Sound Opinions lists its Best Albums of 2025
• An internet confessional
• Bjork “Heirloom”
• Rewatch: “Paradise Lost: The Child Murders at Robin Hood Hills”

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.