Lan Anh Chan: While past performance can’t predict future returns, it can be unsettling to watch your favorite ETFs struggle. In these situations, it’s important to remember that a good strategy should still yield solid risk-adjusted returns throughout different market phases.
There may be times when an ETF’s results look disappointing compared to benchmarks or peers, but what’s crucial is whether that underperformance aligns with the current market dynamics. If a fund falters when you expected it to, it should ideally bounce back when conditions improve. So, let’s take a moment to consider three solid ETFs that didn’t perform well in 2025 and examine the reasons behind that.
3 great ETFs that had a bad 2025
- iShares MSCI USA Quality Factor ETF QUAL
- Avantis US Small Cap Value ETF AVUV
- Vanguard Short-Term Inflation-Protected Securities ETF VTIP
First, let’s discuss the Silver-rated iShares MSCI USA Quality Factor ETF. This ETF aims at large- to mid-cap companies characterized by high profitability, low debt, and consistent earnings growth. We evaluate each company against its industry peers on those parameters, pulling together a strong portfolio of 125 stocks. This selection process ultimately enhances profitability indicators and includes a greater share of wide-moat stocks compared to the Russell 1000 Index.
However, this quality tilt hasn’t provided the advantage expected in this year’s heated market. With lower volatility, it still trailed behind the category index by 6 points from January to October 2025. The year began positively, with a slight outperformance during the market fluctuations from February to April 2025. Yet, the exclusion of major market players that didn’t pass the quality criteria hurt its performance as the market rallied later on. While it may not deliver eye-catching returns in a booming stock market, investors can still count on it in tougher times. It has consistently excelled during periods of market turbulence, including during the volatility earlier this year and the March 2020 market downturn, where it outperformed the category index by 84 basis points. This suggests it should continue to do well moving forward.
Next up is the Silver-rated Avantis US Small Cap Value ETF. While it seeks out lower valuations, it also ensures quality by applying profitability criteria. For selection, companies must have a low price-to-book ratio alongside robust cash flow. The ETF ranks these stocks and includes the leading names until it holds about a quarter of the entire small-cap market. It’s weighted by market cap and aims for a blend of cheaper yet profitable stocks. The resulting portfolio, although heavily value-oriented, has solid fundamentals and seeks to secure a value premium without sacrificing quality.
Unfortunately, small-cap and value stocks have lagged the broader market this year. Accordingly, this ETF mirrors that trend. By the end of October 2025, it was more than 6 percentage points behind the category index, which is a stark contrast to its previous robust returns. Its small-cap focus particularly hindered earnings in the first quarter, as smaller businesses faced market challenges. Although it did capture some recovery in the market, it still remained significantly below the category index because of its value emphasis. However, this shortfall hasn’t wiped out the gains since the ETF’s inception. Thanks to its high-quality stock selection, it has still outperformed the category index by 4.5% annually since 2019. From 2021 to 2024, it outshone the Russell 2000 Value Index by 8 percentage points each year, especially thriving in the small-cap popularity boom of 2021. So, this stock is likely to continue performing well throughout various market conditions, though there might be bumps along the way.
Last but certainly not least, there’s the Gold-rated Vanguard Short-Term Inflation-Protected Securities ETF. This ETF holds inflation-protected U.S. Treasury securities, or TIPS, with less than five years to maturity. As the consumer price index rises, so does the principal of TIPS, leading to higher coupon payouts. Thus, these securities guard investors against sudden inflation, and this ETF only includes short-term TIPS, minimizing interest rate risks. Moreover, since TIPS are backed by the U.S. government, credit risk remains low.
Nonetheless, the ETF’s minimal credit and duration risks haven’t translated well in recent markets. Throughout most of 2025, yields have dropped, while credit spreads have decreased following the early-year downturn, favoring riskier bonds over the ETF’s higher-quality, short-term options. Still, this ETF has historically provided necessary protection during market stress. For instance, it outperformed the category average by over 2 percentage points in 2022 when rising interest rates and inflation severely impacted many asset classes. It also did better than its peers by a similar margin in March 2020, and it should continue to hold strong even as credit spreads widen.
Thanks to its provision of downside protection during significant market shocks, the ETF has consistently outperformed its category average since its inception in 2012 through October 2025, leading to lower volatility and stronger risk-adjusted returns.
