In the final quarter of 2025, the Harbor Active Small Cap ETF faced considerable challenges, notably underperforming its benchmark, the Russell 2000 Index. This period saw active portfolio management decisions, including strategic investments in emerging companies and the divestment from underperforming holdings. This commentary details the market environment, the ETF's performance, and the strategic rationale behind key portfolio adjustments.
Q4 2025 Performance Analysis: Harbor Active Small Cap ETF
In the fourth quarter of 2025, the Harbor Active Small Cap ETF saw a return of -4.29% (NAV), a notable underperformance compared to the Russell 2000 Index's 2.19% return. This disparity was primarily attributed to the ETF's strategic focus on profitable companies with high return on equity, a bias that proved disadvantageous as non-earning and low-ROE stocks unexpectedly led the market rally. Additionally, sector allocation and stock selection decisions within the Health Care and Industrials sectors detracted from overall performance.
The U.S. economy, outside of robust growth in areas like AI, computing power, space, and defense spending, has largely been in a state of stagnation since the peaks of 2022. This broad economic backdrop posed a challenging environment for many investment vehicles. The ETF's management initiated a small position in Wealthfront Corporation, an automated wealth management platform that debuted its IPO in December. Conversely, the entire CarMax position was sold off due to a significant deterioration in its competitive standing, despite its severely depressed price, reflecting a proactive approach to portfolio hygiene.
Strategic Portfolio Adjustments for Future Growth
Looking ahead, the Harbor Active Small Cap ETF is actively positioning for future upside in the small-cap market by accumulating high-quality, competitively advantaged small-cap companies. The investment strategy targets firms trading below their intrinsic value, with a particular focus on sectors such as software, business services, and early cyclicals. These sectors are anticipated to benefit significantly from an eventual broader economic recovery, offering substantial growth potential as market conditions improve.
Key risks for the newly introduced and increased positions include competitive threats, such as new AI entrants impacting companies like DOCS, and cyclicality inherent in sectors like POOL and JBI. Additionally, interest rate sensitivity remains a concern for some holdings, including WLTH. The management team is rigorously monitoring the fundamental performance and competitive landscapes of these investments to mitigate potential risks and ensure the portfolio remains aligned with its long-term objectives for growth and value creation.
