The Harbor International Compounders ETF experienced a quarter of underperformance in Q4 2025, failing to match its benchmark, the MSCI All Country World ex-US Index. This was largely due to specific stock choices across several sectors, although some areas showed promise. Looking ahead, the ETF is strategically adjusting its portfolio to navigate evolving market dynamics and capitalize on potential growth opportunities outside the U.S.
The investment philosophy of the Harbor International Compounders ETF is rooted in a meticulous, research-intensive methodology focused on constructing a portfolio of foreign large-cap companies. The Fund primarily directs its investments towards equity securities of non-U.S. companies with a market capitalization of at least $5 billion. This approach aims to identify robust, high-quality businesses that demonstrate consistent growth and strong competitive advantages in the global market.
Analyzing Q4 2025 Performance and Sectoral Impact
During the fourth quarter of 2025, the Harbor International Compounders ETF recorded a return of 3.80% (NAV), which fell short of its benchmark, the MSCI All Country World ex-US Index, which achieved a return of 5.05%. This performance disparity was predominantly influenced by specific security selections across several key sectors. Negative contributions from choices within Financials, Materials, Consumer Discretionary, and Information Technology were the primary drivers of the underperformance. Conversely, strategic security selections in the Health Care sector provided a modest positive impact, partially offsetting the detractors. Notably, the most significant drag on relative performance came from Information Technology, while a deliberate lack of exposure to the Materials sector surprisingly contributed positively to the ETF's results.
The Q4 2025 results highlight the intricate challenges of active management in a dynamic global market. The substantial underperformance relative to the benchmark signals that certain investment decisions within crucial sectors did not align with market trends or individual stock performances as anticipated. For instance, the negative impact from Financials suggests that the chosen companies either faced unexpected headwinds or did not leverage market opportunities as effectively as their peers within the benchmark. Similarly, the detractions from Consumer Discretionary and Information Technology point to specific stock picks that underperformed, possibly due to competitive pressures, shifting consumer preferences, or technological disruptions. However, the positive contribution from Health Care underscores the portfolio managers' ability to identify resilient companies within a sector often characterized by innovation and stable demand. The beneficial effect of underexposure to Materials also demonstrates a successful defensive play, indicating that the portfolio avoided losses that might have otherwise occurred had it tracked the benchmark's full allocation to this sector. These results necessitate a thorough re-evaluation of the investment thesis behind the underperforming sectors and a reinforcement of the strategies that yielded positive outcomes.
Strategic Outlook and Portfolio Adjustments for 2026
In preparation for the 2026 market dynamics, the Harbor International Compounders ETF is implementing strategic adjustments to its portfolio, signaling an evolving investment thesis. The ETF is intensifying its focus on quality stocks, those companies exhibiting strong fundamentals, sustainable growth, and robust competitive advantages. Furthermore, it plans to broaden its exposure to artificial intelligence (AI), recognizing the transformative potential of this technology across various industries. Simultaneously, the ETF is increasing its allocations to emerging markets such as China and India, anticipating a global shift towards a more fundamental-driven market environment where sustainable growth outside the U.S. will be increasingly valued. These adjustments reflect a proactive stance to adapt to anticipated economic shifts and capture potential alpha in a changing investment landscape.
Recent portfolio changes vividly illustrate the ETF's updated investment philosophy. New positions have been initiated in several promising companies, including Contemporary Amperex Technology, a leader in battery technology, and MercadoLibre, a dominant e-commerce and fintech platform in Latin America. Investments have also been made in Rheinmetall, a German defense contractor, and Tesco, a major UK retailer, signaling a diversified approach to identifying value. Conversely, the ETF has divested from certain holdings, such as Novo Nordisk, a pharmaceutical giant. These exits were prompted by concerns over various factors, including slowing growth trajectories, increased competitive pressures, and elevated valuations that no longer aligned with the ETF's rigorous criteria for long-term compounding. This disciplined rebalancing underscores a commitment to maintaining a portfolio of high-conviction assets that are well-positioned for future growth, while systematically shedding companies that no longer meet the exacting standards of the investment strategy or face significant headwinds.
