3 Great ETFs Having a Lousy 2025

ETF Performance in 2025: Understanding Underperformance & Long-Term Strategy

Key Concepts:

• Risk-Adjusted Returns: Returns evaluated in relation to the amount of risk taken to achieve them.
• Market Cycle: The cyclical pattern of expansion, peak, contraction, and trough in economic activity and investment markets.
• Quality Factor: Investing in companies with high profitability, low leverage, and stable earnings growth.
• Value Tilt: Focusing on stocks trading at lower valuations relative to their fundamentals.
• TIPS (Treasury Inflation-Protected Securities): Bonds indexed to inflation, protecting investors from unexpected price increases.
• Duration Risk: The sensitivity of a bond’s price to changes in interest rates. Lower duration means less sensitivity.
• Credit Risk: The risk that a borrower will default on their debt obligations.
• Basis Points: A unit of measurement equal to 0.01% (100 basis points = 1%).

I. Introduction: The Importance of Long-Term Perspective

The video addresses the common investor concern of seeing underperformance in ETFs they favor. It emphasizes that past performance is not indicative of future returns, but a well-constructed strategy should deliver strong risk-adjusted returns over the full market cycle. Temporary underperformance, even significant underperformance, is not necessarily a cause for alarm if it’s justifiable given prevailing market conditions and the fund’s stated strategy. A key principle is that a fund should recover as expected when market conditions shift.

II. Case Study 1: ASA Msei USA Quality Factor ETF – Quality’s Struggle in a Bull Market

The Silver-rated ASA Msei USA Quality Factor ETF focuses on large to mid-cap companies exhibiting high profitability, low leverage, and stable earnings growth. It selects the top 125 stocks based on these metrics, resulting in a portfolio with stronger profitability and a higher proportion of “wide moat” stocks (companies with sustainable competitive advantages) compared to the Russell 1000 index.

However, this quality tilt hindered performance in 2025’s bull market. Between January and October 2025, the ETF lagged its category index by six percentage points, despite having lower volatility. While it initially outperformed during market volatility (February-April 2025) by 60 basis points, excluding major market leaders that didn’t meet its quality criteria negatively impacted returns during the subsequent rally.

The video highlights that this ETF is designed to outperform during challenging market conditions, as demonstrated by its 84 basis point outperformance during the March 2020 market shock. As stated, “While this fund might not offer the flashiest returns in strong equity markets, investor can continue to count on it during hard times.”

III. Case Study 2: Avantis US Small Cap Value ETF – Value and Small-Cap Underperformance

The Silver-rated Avantis US Small Cap Value ETF seeks undervalued companies while avoiding distressed firms. It employs a dual screening process, requiring both a low price-to-book ratio and strong cash flow. The ETF holds approximately a fourth of the total small-cap universe, weighting stocks by market capitalization with a tilt towards cheaper and more profitable companies. This results in a portfolio with a strong value tilt and solid fundamentals.

Despite this approach, the ETF underperformed in 2025, trailing the category index by over six percentage points year-to-date (as of October 2025). This was due to the broader underperformance of both small-cap and value stocks. The ETF’s small-cap focus was a drag on returns during the first quarter’s volatility, and its value tilt limited gains during the subsequent rebound.

However, the video stresses that this underperformance hasn’t erased the ETF’s long-term advantage. Since its 2019 inception, it has outperformed the category index by 4.5 percentage points annually. Between 2021 and 2024, it outperformed the Russell 2000 Value Index by 8 percentage points per year, particularly benefiting from the favorable conditions for small-value stocks in 2021. The expectation is that it will continue to perform well over the full market cycle, albeit with potentially “a slightly bumpier ride.”

IV. Case Study 3: Vanguard Short-Term Inflation Protected Securities ETF – Quality’s Struggle in a Falling Rate Environment

The Gold-rated Vanguard Short-Term Inflation Protected Securities ETF (TIPS) invests in inflation-protected U.S. Treasury bonds with maturities of less than five years. TIPS protect investors against unexpected inflation by adjusting the principal amount based on changes in the Consumer Price Index (CPI). This ETF also minimizes interest rate risk due to its short-term focus and negligible credit risk as TIPS are backed by the U.S. government.

Despite these safeguards, the ETF underperformed in 2025. Falling yields for most of the year and narrowing credit spreads (following an initial widening in the first quarter) favored riskier bonds over the ETF’s high-quality, low-duration portfolio.

However, the video reiterates that the ETF’s primary benefit is protection during stressed markets. It outperformed the category average by over 2 percentage points in 2022, when rising interest rates and high inflation negatively impacted most asset classes. It also outperformed in March 2020. Since its 2012 inception (through October 2025), the ETF has beaten its categorical average with lower volatility and better risk-adjusted returns.

V. Logical Connections & Synthesis

The video establishes a clear connection between investment strategy, market conditions, and ETF performance. It demonstrates that even well-designed ETFs with strong long-term track records can experience periods of underperformance. The key takeaway is that investors should not panic sell based on short-term results but should instead understand why an ETF is underperforming and whether that underperformance is consistent with its investment strategy and the prevailing market environment.

The three case studies illustrate this point effectively: a quality ETF struggling in a bull market, a value/small-cap ETF underperforming when those factors are out of favor, and a TIPS ETF lagging in a falling-rate environment. All three are expected to deliver on their promises during different phases of the market cycle.

The video concludes by reinforcing the importance of a long-term perspective and focusing on risk-adjusted returns rather than chasing short-term gains.