Photo by Kanchanara on Unsplash
 

Cycles and trends in the global markets wax and wane with the passage of time. Today's blog reviews returns and net cash flows of benchmark index ETFs in 2025 in comparison with the five years, then attempts to provide insights into future trends.  

The first table focuses on US equity ETFs.
 

Footnote: QQQ changed its structure in December from trustee driven into a true ETF run by a portfolio manager.  This provides increased operational efficiency and exposure to additional income streams which in turn allowed them to lower their expense ratio from 0.20% to 0.18%

Despite dire predictions in January by many economists and sell-side strategists concerned with tariffs, a falling dollar, mega-tech concentration in index funds and other projected trends, 2025 was a great year for equity performance.  For the third straight year, QQQ, the Invesco QQQ Trust, was the top performing ETF with a robust 20.8% gain. It outgained the 17.8% increase posted by Vanguard S&P 500 ETF (VOO) by more than 300 basis points.  In keeping with four prevalent trends since the beginning of 2010:

1. Growth outperformed value.  The Vanguard Growth ETF (VUG) returned 19.4% while the Vanguard Value ETF (VTV) gained 15.3% or 410 basis points less. 
2. Market-cap weighting increased returns substantially for the same 500 stocks as Invesco Equal-Weighted S&P 500 ETF (RSP) gained just 11.2%.  The large differential between VOO and RSP for the 5-year annualized period demonstrates that this year’s differential was no fluke.
3. Large cap stock index ETFs substantially outperformed their small cap counterparts.  The iShares Russell 3000 ETF’s (IWM) was just 12.7%. Counterintuitively, our midcap ETF benchmark, SPDR S&P Midcap 400 ETF Trust (MDY) fared considerably worse with a 7.2% return for the year.
4. The worst performer among the group of US equity asset class ETFs we track the ProShares S&P 500 Dividend Aristocrats (NOBL) with 6.8%.  These are the companies that have raised their dividends every year for at least the past 10 years.  The index was designed not to maximize dividend yield but to mitigate volatility with consistency.  Such stocks used to be called “blue chips.”  Since the strategy was designed to lower market risk, it participated much less in this century’s strong US equity returns than the benchmark indexes.

“FF” in the above table stands for fund flows and refers to the net new funds contributed to the ETFs at the distributor level. In keeping with a “follow the money” strategy, the four worst performers last year experienced net outflows while the top performing funds received huge net inflows.

With respect to 2025 returns, will 2026 be substantially different with regard to the four trends above? Many strategists think so and have some data trends to back up their assertions. Our July blog review of the first half of 2025 showed a 700-basis point difference in return between QQQ and VOO.  This margin was halved by year-end.  There was a notable fourth quarter trend to reduce exposure to a potential “AI crash” by rotating toward stocks with more reasonable valuations.  Moreover, the first two mixed-return weeks of 2026 provided more evidence that the fourth-quarter trend may continue. Value ETF VTV has gained 3% while its growth counterpart VUG is down 0.3% on the year.  Small-cap IWM has gained 6.8%, much better than S&P 500 proxy  VOO.  The latter has risen just 1.2% year-to-date. Thus far our models do not agree as can be seen by the ratings in the table.  That said, our models are adaptive and dynamic. Specifically, if earnings and/or earnings forecasts drop for the stock leadership driving QQQ and VUG, their ratings from our models may drop, perhaps substantially.  Since estimates have not yet been revised downward and perhaps will not be, we believe that QQQ and VUG will continue to outperform. Our ratings are data-driven.

In this blog, we also track index ETFs and ETVs for non-US equities, US fixed income, precious metals, commodities, and bitcoin even though none of these asset classes are rated by our models.  The results this year were eye-opening. 
 

The most striking numbers on the table are the huge returns posted by the two precious metal ETVs (Exchange-Traded Vehicles, specifically grantor trusts, not mutual funds). The 145% gained by silver and 64% gained by gold were all-time highs for these ETVs. These gains reflected, although not precisely tracked, similarly outsized gains in spot prices for these metals.  Spot silver had never risen this much in one year before.  Spot gold hadn’t risen this far in US dollar terms since 1930.  While the return propelled iShares Silver Trust SLV into the 5-year annualized lead, iShares Gold Trust IAU leads SLV since the latter’s 2006 inception.  More impressively, IAU now leads VOO by more than 300 basis points since its inception in 2003. Interestingly, although precious metals comprise a significant portion of the S&P GSCI Commodities Index, its grantor trust GSG did not have a strong year, gaining just 5.9%. The huge decline in oil prices, a larger component of the GSCI had a lot to do with that result.

Turning back to the two more conventional asset classes, there is a trend that bucked recent history heading into 2025.  As well as US Stocks performed this year, foreign stock benchmark index ETFs posted larger gains.  Emerging markets ETF EEM nearly doubled the return of VOO and foreign developed markets ETF EFA was not far behind and was also well ahead of QQQ.   The falling of the dollar relative to other currencies is the main culprit.

Fixed income returns were less surprising even though they also bucked recent trends with AGG gaining nearly 75% more than SGOV as the US yield curve went positive. 

While VOO, as usual, received the highest net volume of fund flows, Short-term ETFs led by SGOV received the most inflows among fixed income benchmark ETFs and more net inflows than QQQ.  Relative to their asset levels, gold as measured by IAU and Silver (SLV) received an even greater percentage of inflows.  For many investors, safety and diversification away from equity concentration risk were premium goals despite the well-above-average returns posted by most equity ETFs.

No review is complete without including the 11 State Street Select Sector SPDRs.  This year, we added three of the largest subsectors we found most interesting in 2025.  Here is the 2025 year-end review for the 11 subsectors and three subsectors.
 

It is no surprise that for the third straight year, technology ETF XLK had the highest 2025 gain.  However, all three subsector SPDR ETFs included here outgained them by a considerable margin.  The top performer State Street SPDR S&P Metals & Mining, XME outgained XLK by three-and-one-half times with a whopping 83.5%.  This relates to the huge rise in precious metals prices in 2025.  Another symptom of geopolitical anxiety was the meteoric 46% rise by XAR representing the Aerospace and industries.  XBI represents Biotech, a very high standard deviation subsector, is generally feast or famine.  Buoyed by a big fourth quarter this year’s return of 36% represents a feast but was not enough to propel the subsector’s 5-year return out of negative territory.

Focusing on the actual sectors, XLC, the Communications Services Sector SPDR and XLI, the Industrial Sector SPDR are the only sectors to join XLK in outperforming the S&P 500.  XLU, the Utilities SPDR had also been in this category after 11 months before taking a sudden December nosedive due to huge usage spikes by AI applications leading to concerns of a capacity crisis and skyrocketing costs.  That did not prevent the low-Beta sector from enjoying the highest amount of net inflows last year.  The highest amount of net outflows was suffered by XLE, the Energy Sector SPDR. This is partially due to the large amount of inflows in November and December buoyed by expectation that Trump’s election would lead to a “dirty energy” boom.  These expectations were quickly reversed by other geopolitical realities.  On the short end of the return spectrum, two of the bottom three sectors are consumer-oriented, which highlights the well-reported economic doldrums pinching consumers’ wallets.     

The top 22 performing indexed ETFs by the major category providers reflected two major trends already highlighted: huge inflation in the value of all metals and minerals and the increased relative attractiveness of ETFs of countries other than the US, partially attributable to relative decline of the dollar in addition to other factors.
 

Looking ahead to relative performance in 2026, our models are still most bullish on XLK, the State Street Technology SPDR despite widespread fears of a bubble.  Its rating remains at 5 (Strong Buy).  The next most attractive sector is Health Care as represented by XLV.  Its rating is 4 (Buy).  The Finance SPDR, XLF, long amongst our most attractive, has fallen to a 3 (Hold) while Utilities ETF XLU is now rated 2 (Sell).  Three sector ETFs get our lowest rating of 1 (Strong Sell).  They are Energy, XLE, Real Estate, XLRE and Consumer Discretionary, XLY. 

Turning to individual stocks and with many investors focusing on growth at reasonable prices in this environment, we’ve included the top companies with reasonable valuations and meeting investible criteria.  This list has been included in a few contest entries as our top-ten portfolio for the year.  That said, please remember that our ratings are dynamic and at some time later this year, they might be much lower rating.  This problem is endemic for all year-long frozen portfolios entered in prediction competitions, but we believe that context is important when sharing lists and data.

In summary, geopolitical news grabs all the headlines, but ValuEngine ratings and quantitative data are solely based on fundamental, pricing, and economic data.  Despite evidence of rotation, our models still favor concentrated growth stock indices.  However, proceed with caution. Metals and defense were among the best performing sub-sectors in 2025 and given expectations that prevailing uncertainties will continue indefinitely, these sectors should continue to perform well albeit perhaps not quite so robustly.

We live in unprecedented times.  In a sense, we always do.  However, geopolitical unrest is at its highest since 2002 and government intrusiveness seems to be at its greatest since the FDR era.  This increases both positive and negative standard deviations in predicting future probabilities of outcomes.  Current unprecedent global initiatives by this Administration could bring unprecedented prosperity to US investors.  That is certainly among the goals being sought.  However, there are significant voices that are very concerned about global-economic stability and the value of fiat currencies going forward. The refrain is that breaching precedents is risky and that they had been established for decades for good reason.  It is nearly impossible for investors to know in advance what progress is and what grievous error is.  Time will tell.

As for ValuEngine, we must rely on our data and assume that the factors driven by the market and economic data that power our model will continue to apply to future events.  That is the power of adaptive stochastic modeling.  Beyond that, human anxiety and emotional responses tend to do more to destroy wealth than to preserve and/or augment it.

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