An ETFSector.com Sector Fund Universe Review
Even in a year when U.S. equities finished broadly higher, the bottom of the ETF return distribution tells an important story: 2025 rewarded concentrated exposure to capital-spending beneficiaries and scarcity trades, while several classic “diversifiers” failed to diversify. In the ETFSector.com Sector Fund Universe comprised of 134 of the most liquid US domiciled sector related ETFs, the weakest performers clustered into a few familiar buckets—rate-sensitive real estate, defensive staples, software/cloud, upstream energy/natural gas, and select healthcare niches. These groups share a common trait: their underlying holdings faced either macro headwinds (rates, commodity prices) or relative headwinds (missing the year’s dominant earnings engines).
The worst performers
The table below shows the bottom 15 ETFs in the ETFSector.com Fund Universe, ranked by 2025 1-year total return.
| Rank | Ticker | ETF | 2025 1Y Total Return |
|---|---|---|---|
| 1 | WCLD | WisdomTree Cloud Computing Fund | -6.69% |
| 2 | KBWY | Invesco KBW Premium Yield Equity REIT ETF | -5.40% |
| 3 | FXG | First Trust Consumer Staples AlphaDEX Fund | -2.60% |
| 4 | FCG | First Trust Natural Gas ETF | -2.23% |
| 5 | XOP | SPDR S&P Oil & Gas Exploration & Production ETF | -2.12% |
| 6 | RSPR | Invesco S&P 500 Equal Weight Real Estate ETF | -1.83% |
| 7 | XSW | SPDR S&P Software & Services ETF | -0.90% |
| 8 | RSPS | Invesco S&P 500 Equal Weight Consumer Staples ETF | -0.85% |
| 9 | PSCH | Invesco S&P SmallCap Health Care ETF | -0.49% |
| 10 | XHE | SPDR S&P Health Care Equipment ETF | -0.24% |
| 11 | FTXN | First Trust Nasdaq Oil & Gas ETF | -0.13% |
| 12 | AMZA | InfraCap MLP ETF | +0.49% |
| 13 | DFAR | Dimensional US Real Estate ETF | +1.34% |
| 14 | JPRE | JPMorgan Realty Income ETF | +1.38% |
| 15 | XLP | Consumer Staples Select Sector SPDR Fund | +1.54% |
(All returns above come directly from your provided spreadsheet.)
Why these funds lagged in 2025
The lowest return in the list, WCLD, is a good example of how category labels can mislead in a year dominated by a very specific kind of “tech” leadership. Cloud and software-heavy funds tend to carry more exposure to application software, subscription growth, and enterprise spending cycles. In 2025, that part of the market often faced tougher “proof of ROI” scrutiny relative to the year’s biggest tech winners, which were more closely tied to AI infrastructure and compute bottlenecks. This is one reason software-tilted funds like XSW also landed in the bottom cohort: their holdings were more exposed to the “monetization and budgets” debate than to the “hardware and buildout” boom.
Real estate’s laggards—KBWY, RSPR, DFAR, and JPRE—look different on the surface, but they share similar economic exposures. REIT-heavy funds are structurally sensitive to the level and volatility of interest rates and to refinancing conditions. Even when the direction of policy rates turns friendlier, REITs can still struggle if investors remain focused on term premium, funding costs, and the opportunity cost versus higher yielding alternatives. Within the real estate cluster, construction differences matter: high-yield REIT baskets (KBWY) and equal-weight real estate approaches (RSPR) tend to amplify exposure to smaller or higher-leverage names—exactly the cohort that can underperform when capital remains selective.
The staples complex—XLP, RSPS, and FXG—illustrates another 2025 pattern: a “defensive” label doesn’t guarantee defensive performance. Consumer staples tend to win when markets prize stability and dividends, but 2025’s tape frequently rewarded earnings torque and growth narratives instead. Construction also played a role: equal-weight staples (RSPS) and factor/selection staples (FXG) can tilt away from the largest benchmark anchors and toward smaller or more idiosyncratic names, which can lag when investors crowd into the biggest, most liquid winners.
Energy exposure in this laggard list is concentrated in upstream and gas-linked funds—FCG, XOP, and FTXN—plus a modestly positive MLP vehicle (AMZA). Upstream E&Ps and natural gas producers are essentially high operating leverage expressions of commodity price direction. When crude and/or gas pricing is weak or volatile, these funds tend to suffer more than integrated energy or midstream-heavy exposures. In other words, the issue in 2025 for these particular energy ETFs wasn’t “energy” in the abstract; it was which slice of energy they owned and how much commodity beta was embedded in the holdings.
Finally, the healthcare laggards—PSCH (small-cap healthcare) and XHE (equipment)—are consistent with a year where investors often preferred either mega-cap earnings visibility or very specific pockets of growth. Small-cap healthcare can be sensitive to financing conditions and to sentiment around pipelines and reimbursement, while equipment can be exposed to procedure volumes, hospital capex cycles, and reimbursement/mix dynamics. When those tailwinds are not synchronized, the category can quietly underperform even if the broader market is up.
Where opportunity may improve in 2026 among these laggards
The most compelling potential rebound candidates among 2025’s laggards are the groups that were held back by macro constraints that could plausibly ease. If 2026 brings a continuation of a “rates drifting lower / policy easing” environment, real estate funds like RSPR, DFAR, JPRE, and even KBWY could see improved relative performance. The mechanism is straightforward: REIT cash flows are long-duration, and sentiment toward the group often improves when investors gain confidence that refinancing risk is falling and that future cap rates are stabilizing. The caveat is that within this cluster, the higher-yield or smaller-cap tilts can rebound sharply—but they can also remain fragile if credit spreads widen or if the economy slows in a way that hits occupancy or rent growth.
Consumer staples could also look better in 2026—not because the holdings suddenly become exciting, but because the setup changes if growth broadens less than expected or if volatility returns. Staples tend to regain relative footing when the market becomes more focused on downside control, dividends, and earnings stability. Within your laggard cohort, XLP is the cleanest “benchmark staples” exposure, while RSPS and FXG are more construction-sensitive and may behave differently depending on whether leadership stays concentrated in a few staples bellwethers or broadens to smaller names.
Energy’s laggards are more conditional. Upstream-heavy ETFs like XOP and FTXN, and gas-oriented FCG, can certainly rebound in 2026—but the catalyst typically must be commodity-driven (demand surprises, supply discipline, geopolitical risk, or a shift in inventory conditions). If the market remains anchored to oversupply narratives, upstream leverage remains a headwind. The opportunity case here is less about valuation mean reversion and more about whether the commodity tape changes.
Healthcare equipment (XHE) and small-cap healthcare (PSCH) are the type of laggards that can improve if the market transitions toward broader participation and if financing conditions become less restrictive. A better 2026 setup would include improved visibility on procedure volumes, stabilization in reimbursement narratives, and renewed M&A appetite (which can matter disproportionately for smaller healthcare names). These categories don’t need a roaring economy to improve, but they do tend to benefit from a market that is willing to underwrite longer-dated fundamentals.
Software/cloud (WCLD, XSW) is a similar “confidence and breadth” call. These funds can rebound if investors rotate from AI infrastructure into the application layer—especially if enterprise spending improves and the market becomes more comfortable valuing recurring revenue growth. The simplest 2026 opportunity path for these laggards is a scenario where “AI ROI” shifts from skepticism to measurable productivity, allowing more companies in the software stack to show clearer monetization.
2026 Outlook
A useful way to think about these underperformers is that they split into two opportunity types. Real estate and staples are primarily macro-rate and risk-regime plays: they tend to do better when rates are falling, volatility rises, or investors demand stability. Energy upstream and natural gas are primarily commodity-tape plays: they need supply/demand or price momentum to change. Cloud/software and certain healthcare niches are breadth and confidence plays: they benefit when the market rotates from a narrow leadership set into a wider opportunity set.
