By Lewis Braham
Despite some bumps along the road, 2025 was a solid year for stock and bond funds, as was its final quarter.
For cryptocurrency funds, though, the quarter was a textbook illustration of the dangers of too much leverage.
A selloff in October -- triggered by a sudden escalation of the trade war with China -- caused crypto funds to crash, thanks to record levels of borrowing applied by crypto traders to the sector. That triggered forced selling from margin calls by brokers, driving down security prices for even unlevered investors, who suffered collateral damage.
The average fund in Morningstar's digital-assets category nosedived 19.2% in the fourth quarter, making it the second-worst-performing category, behind equity digital assets investing in crypto-related stocks, such as Coinbase Global, which were down 19.8%. The largest digital-asset fund, the $67 billion iShares Bitcoin Trust exchange-traded fund, fell 23.5% in the quarter and lost 7.1% in 2025.
It was the opposite case for gold bullion and gold-miner stock funds. The $147 billion SPDR Gold Shares ETF gained 12.5% last quarter and surged 64.4% for the year. But that pales in comparison to funds in Morningstar's equity precious-metals category, as miner stocks have a leveraged relationship to the price of bullion. The $26 billion VanEck Gold Miners ETF was up 13.5% in the quarter and a surreal 155.6% for the year. That's slightly behind the category average's 18.3% quarterly and 161.7% 2025 returns, making it by the far the year's best-performing fund category.
Can the good times continue for such a narrow, volatile sector? Probably not, as sector leadership often switches from year to year. Those expecting the silly 795% 2025 returns of the year's best performer, the leveraged $2.1 billion MicroSectors Gold Miners 3X Leveraged, to repeat are almost surely fooling themselves. A small position in a gold bullion fund such as SPDR Gold Shares, while pricey now, can serve as a ballast in uncertain times, as long as one doesn't treat it as a speculative short-term investment.
One should also avoid short-term speculation even with portfolio mainstays like the $1.5 trillion Vanguard S&P 500, which was up a solid 2.7% for the quarter and 17.8% in 2025. The index ETF has a trailing 12-month price/earnings ratio of 27.6, according to Morningstar Direct, when historically its average is 16. In the past three years, the ETF's 23% annualized return is more than double its long-term average return of 11%. The good times can't last forever, yet a low-cost index fund is a great choice for patient investors who are willing to ride out the bad.
Not that such a strategy fully explains the surge of money into S&P 500 products. Once again, the Vanguard S&P ETF had the biggest inflows by a wide margin, some $40.9 billion for the first two months of the quarter through Nov. 30 and $125 billion for 2025 to date. (December flow numbers aren't yet available.)
More interesting right now are international stock funds. Vanguard Total International Stock had the largest inflows for foreign funds, but at $4.5 billion, it's small potatoes compared with Vanguard's S&P 500 ETF. That's despite the fact the fund beat the S&P 500 both last quarter, returning 4.5%, and in 2025, 32.2%. It has a trailing P/E of 17.1, retaining a sizable valuation discount to U.S. large-cap stocks.
The valuation gap and return potential should be even greater with a tilt toward value stocks. The foreign large value fund category was the fifth-best-performing category last quarter, up 6.5%, and the only diversified non-sector-specific category in the top five. On the ETF side, iShares International Select Dividend and GMO International Value were each up over 9% for the quarter and over 45% in 2025. Each still has cheap trailing P/E ratios of about 12, less than half the S&P 500. Mutual funds EuroPac International Dividend Income and DWS CROCI International were also strong.
Perhaps the biggest surprise in the quarter was the sudden resurgence of healthcare stock funds, with the average fund in Morningstar's Health fund category up 13.3%. This marks a sharp reversal for the long-problematic growth sector, especially when compared with the more beloved tech fund category, which was up 22.8% for the year but only 0.4% in the quarter.
A number of experts have speculated on the reasons for the sector rotation to healthcare but haven't come up with a definitive answer. One cause could be artificial-intelligence fatigue, while healthcare stocks remain relatively cheap. Another could be a spate of acquisitions in the sector, while a third reason could be the promise of more blockbuster weight-loss drugs. The prospect of declining interest rates could also help biotech companies, as they depend heavily on debt to finance their drug research and development. Finally, the current political administration seems to have eased up on drugmakers regarding tariffs and drug prices.
Investors continued to turn from active to passive management and from mutual funds to ETFs. Through Nov. 30, investors pulled some $457 billion from active U.S. equity mutual funds, $110 billion of that just in the first two months of the fourth quarter. Yet the quarter saw a net $185 billion of inflows into active funds overall because of the increasingly popularity of active ETFs and active bond funds -- $19 billion into the former and $24 billion into the latter.
Meanwhile, billions keep flying out of excellent mutual funds like Vanguard Primecap, which lost $16.1 billion in asset flows in 2025 but beat 98% of its large blend category peers with a 29.9% return. Yet the fund distributed over $27 per share in taxable capital gains in 2025 and over $9 in 2024. Investors seeking tax efficiency are better off with ETFs.
Some marquee fund managers have held out from launching ETFs, but their numbers are shrinking. In November, Vanguard rolled out the Vanguard Wellington Dividend Growth Active ETF, which has the same Wellington Management manager, Peter Fisher, as the $44 billion Vanguard Dividend Growth fund. The mutual fund distributed almost $5 a share in taxable capital gains in December and saw almost $10 billion in outflows in 2025.
The ETF holdouts will probably cave soon.
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(END) Dow Jones Newswires
January 08, 2026 01:00 ET (06:00 GMT)
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