During the final quarter of 2025, the Harbor Active Small Cap ETF faced considerable challenges, posting a negative return that starkly contrasted with the positive trajectory of the broader Russell 2000 Index. This period saw the ETF's net asset value decline by 4.29%, substantially lagging behind the index's 2.19% gain. Several key events influenced this performance, including significant shifts in individual stock valuations and strategic portfolio reallocations. Notably, the investment strategy emphasized high-return-on-equity, quality-focused companies, a factor that, surprisingly, led to underperformance as the market disproportionately rewarded companies with lower return on equity.
Detailed Investment Performance and Strategic Adjustments
In the fourth quarter of 2025, the Harbor Active Small Cap ETF (the "ETF") recorded a net asset value (NAV) return of -4.29%. This performance diverged sharply from the Russell 2000® Index, which posted a gain of 2.19% during the same period. This substantial underperformance marks a continuation of a challenging phase for the ETF, reflecting a market environment that has not favored its investment philosophy since April 2025. The ETF's strategy, which prioritizes high-return-on-equity and fundamentally strong companies, found itself out of sync with a market trend that saw lower-return-on-equity stocks appreciating significantly.
Several individual holdings played pivotal roles in the quarter's outcomes. Pool Corporation's shares saw a notable decline of 25.96%, despite the company reporting slightly better-than-expected third-quarter earnings. This downturn contributed negatively to the ETF's overall performance. Conversely, The Middleby Corporation experienced an 11.59% increase in its stock value. This positive movement was catalyzed by the company's announcement of its intention to divest a majority stake in its residential kitchen segment, a strategic move that was well-received by investors.
In response to evolving market conditions and internal evaluations, the management of the Harbor Active Small Cap ETF made strategic adjustments to its portfolio. A new, modest position was initiated in Figure Technology Solutions (FIGR), following a period of post-IPO stabilization in its stock price. This move reflects a targeted belief in FIGR's long-term growth prospects. Concurrently, the ETF reduced its exposure to the Consumer Discretionary sector. This involved the complete divestiture of its CarMax holdings and a partial reduction in its position in Warby Parker. These adjustments underscore a tactical repositioning aimed at optimizing the risk-reward profile of the portfolio in a dynamic market.
Navigating Market Discrepancies and Embracing Adaptability
The recent performance of the Harbor Active Small Cap ETF underscores the persistent challenge investors face in reconciling fundamental value with short-term market trends. While a disciplined focus on high-quality, high-ROE companies is often a sound long-term strategy, market cycles can temporarily favor less fundamentally robust enterprises. This highlights the importance of adaptability in investment management. The ETF's strategic reallocations, including its entry into Figure Technology Solutions and its measured exits from certain Consumer Discretionary holdings, exemplify a proactive approach to realigning with emerging market opportunities while managing risk. Investors and fund managers alike can learn from this period that strict adherence to a single investment style, without consideration for prevailing market narratives, can lead to temporary underperformance, yet strategic agility can provide avenues for future growth.