Underperforming ETFs: Identifying and Avoiding High-Risk Funds in a Volatile Market

In an era marked by rapid market shifts and evolving investor strategies, exchange-traded funds (ETFs) remain a cornerstone of diversified portfolios. However, not all ETFs deliver consistent returns, particularly those with structural vulnerabilities or misaligned market exposure. This article examines two of the worst-performing ETFs of 2025-the Direxion Daily Junior Gold Miners Index Bear 2x Shares ETF (JDST) and the Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS)-to highlight how design flaws and sector-specific trends can amplify losses. By dissecting their trajectories, investors can better navigate the risks inherent in leveraged and inverse products.

Structural Flaws in Leveraged Inverse ETFs

JDST and SOXS exemplify the pitfalls of leveraged inverse ETFs, which aim to deliver multiples of the inverse performance of their underlying indices. These funds employ daily compounding mechanisms to amplify returns, but this structure becomes a liability in volatile or trending markets. For instance, JDST, which takes a 2x short position on junior gold miners, has plummeted nearly 90% year-to-date in 2025. This collapse coincides with a surge in gold prices and mining stocks, driven by inflationary pressures and safe-haven demand. The fund's daily rebalancing exacerbates losses, as compounding errors accumulate over time-a well-documented challenge for leveraged products.

Similarly, SOXS, a triple-leveraged inverse semiconductor ETF, has lost 85.8% of its value as demand for chips skyrockets amid the AI boom. The semiconductor sector's upward trajectory, fueled by advancements in generative AI and cloud computing, has rendered SOXS's inverse strategy counterproductive. Daily compounding further compounds the issue, as the fund's structure forces it to sell low and buy high to maintain its 3x leverage ratio. These examples underscore how leveraged inverse ETFs are ill-suited for long-term holding, particularly in sectors experiencing sustained growth.

Broader Market Shifts and ETF Underperformance

Beyond structural flaws, broader market dynamics have contributed to the underperformance of certain ETFs. For example, the iShares MSCI USA Quality Factor ETF (QUAL) has lagged the market in 2025, as its focus on high-quality, low-debt stocks underperformed during a rally driven by high-growth equities. Similarly, the Avantis US Small Cap Value ETF (AVUV) and the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) have struggled due to waning demand for small-cap and value stocks and declining yields on Treasury Inflation-Protected Securities (TIPS) according to Morningstar analysis.

A critical structural issue lies in the erosion of traditional diversification benefits. Historically, stocks and bonds exhibited a negative correlation, allowing investors to hedge risks effectively. However, in 2025, both asset classes have moved in tandem, driven by persistent inflation, fiscal imbalances, and policy uncertainty. According to a report by BlackRock, this breakdown has heightened portfolio risks and forced investors to seek alternatives such as commodities and digital assets for uncorrelated returns.

Lessons for Investors

The struggles of JDST, SOXS, and other underperforming ETFs highlight the importance of scrutinizing a fund's structure and market exposure. Leveraged and inverse ETFs should be used cautiously, ideally for short-term tactical bets rather than long-term holdings. Investors should also reassess sector allocations in light of macroeconomic trends-such as the AI-driven semiconductor boom or the re-rating of gold as a strategic asset.

Moreover, the breakdown of traditional diversification underscores the need for dynamic portfolio construction. As BlackRock notes, investors must embrace alternatives and re-evaluate historical relationships between asset classes to mitigate risks in an increasingly interconnected market.

Conclusion

The 2025 underperformance of ETFs like JDST and SOXS serves as a cautionary tale about the interplay between structural design and market conditions. By understanding the mechanics of leveraged products and staying attuned to macroeconomic shifts, investors can avoid high-risk funds and position their portfolios for resilience in a volatile landscape.