Three ETFs with Disappointing 2025 Performance
Lan Anh Tran: While past performance doesn't guarantee future returns, witnessing underperformance in an ETF you trust can be unsettling. However, it's crucial to remember that a robust strategy should consistently deliver strong, risk-adjusted returns throughout the market cycle. Even if an ETF's performance lags behind its benchmark or peers at times, understanding the reasons behind this underperformance is essential. If an ETF stumbles when expected, it should also recover when anticipated. Let's explore three notable ETFs that have had a challenging 2025 and delve into the reasons behind their struggles.
- iShares MSCI USA Quality Factor ETF (QUAL) This Silver-rated ETF focuses on large- to mid-cap companies with high profitability, low leverage, and stable earnings growth. It meticulously ranks companies against sector peers based on these criteria and constructs a 125-stock portfolio comprising the top-ranked names. The result is a portfolio with superior profitability metrics and a higher proportion of wide-moat stocks compared to the Russell 1000 Index.
Despite its quality-focused approach, the ETF's performance has been hindered by the current market conditions. It lagged the category index by 6 percentage points from January to October 2025, albeit with lower volatility. While it started the year strongly, outpacing the benchmark by 60 basis points during market volatilities in February and April 2025, the exclusion of major market leaders that didn't meet its quality screen negatively impacted performance during the subsequent market rally. Although this fund may not yield the most impressive returns in robust equity markets, investors can rely on it during challenging times. It has consistently outperformed when others wobbled, such as during the market volatilities in early 2025 and the March 2020 market shock, where it outperformed the category index by 84 basis points.
- Avantis US Small Cap Value ETF (AVUV) This Silver-rated ETF seeks lower valuations while avoiding distressed stocks by incorporating a profitability screen to its criteria. Companies must meet specific criteria, including a low price/book ratio and strong cash flow, to be included. The ETF ranks stocks based on these factors and constructs a portfolio of top-ranking names, aiming to hold a quarter of the total small-cap universe. It then weights the selected stocks by their market capitalization, favoring cheaper and more profitable stocks. The resulting portfolio exhibits a deep-value tilt while maintaining excellent fundamentals, effectively harvesting the value premium without compromising quality.
Unfortunately, both small-cap and value stocks have faced challenges in 2025, mirroring the broader market's struggles. As a result, this ETF has trailed the category index by over 6 percentage points year-to-date, contrasting its strong performance in previous years. The ETF's small-cap focus negatively impacted its returns during the first quarter's market volatilities. While it captured some of the subsequent market rebound, it did so to a lesser extent than the category index due to its strong value tilt. Nonetheless, this underperformance hasn't erased the ETF's long-term advantage. Since its inception in 2019, it has outperformed the category index by 4.5% annually, thanks to its high-quality portfolio and sensible value tilt. Between 2021 and 2024, it outpaced the Russell 2000 Value Index by 8 percentage points annually, especially when small-value stocks were in favor in 2021. It is expected to continue performing well in these conditions and over the full market cycle, even if the journey may be slightly bumpier.
- Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) This Gold-rated ETF invests in inflation-protected Treasuries, known as TIPS, with less than five years to maturity. TIPS have a unique feature: their principal amount rises when the Consumer Price Index increases, resulting in higher coupon payments when inflation rises. This ETF protects investors against unexpected inflation and focuses on short-term TIPS, which carry minimal interest rate risk. Additionally, it has negligible credit risk, as TIPS are issued by the US Treasury and backed by the US government.
Despite its low credit and duration risk, the ETF's performance has not been rewarded in recent markets. Yield trends have been downward for most of 2025, and credit spreads plunged after the initial bust in the first quarter, favoring riskier bonds over the ETF's high-quality, low-duration portfolio. However, this ETF has a proven track record of providing protection during stress markets. In 2022, it outperformed the category average by over 2 percentage points as rising interest rates and high inflation pushed most asset classes into negative territory. It also outperformed the category average by over 2 percentage points in March 2020 and is expected to continue outperforming when credit spreads widen. Since its inception in 2012, the ETF has beaten the category average through October 2025, offering lower volatility and better risk-adjusted returns.
For more insights from Lan Anh Tran, explore the article 'Three Promising Bond ETFs to Keep an Eye On' on Morningstar.com.
The author or authors do not own shares in any securities mentioned in this article. Morningstar's editorial policies ensure transparency and integrity in our content.
