Unlock the ETF Secrets Experts Use to Build Durable Portfolios

Everyone wants to know which ETFs made investors the most money over the last five years. It’s a natural question. It’s also the wrong one.

Chasing the hottest funds is what I call rear-view mirror investing. It feels safe, but you’re steering your portfolio by looking at where you’ve already been. That’s a fantastic way to drive straight into a ditch. Before you even think about buying yesterday's winners, you need to internalize one simple, brutal rule that governs all of finance.

Past performance is not just a poor indicator of future results; it's often a trap set for undisciplined money.

Insights

• Chasing top-performing ETFs is a losing game that often leads to buying assets at dangerously high valuations.
• Semiconductor and US tech ETFs have dominated the last five years, with funds like the VanEck Semiconductor ETF (SMH) delivering staggering 5-year annualized returns around 28% as of mid-2025.
• The biggest risks in this strategy are reversion to the mean, extreme concentration in a few stocks, and buying into hype cycles just as they are about to burst.
• A durable strategy uses a "Core and Explore" approach, combining a foundation of diversified, low-cost funds with smaller allocations to specific sectors or themes.
• Smart ETF evaluation goes beyond past performance. You must analyze the expense ratio, liquidity, and how well it tracks its index.

The Leaderboard: What Actually Topped the Charts?

Let's get to the question you came here for. Which non-leveraged ETFs delivered the best returns over the last five years? The answer is clear and overwhelmingly points to one place: technology, and specifically, the semiconductors that power it.

Most professional rankings rightly exclude leveraged and inverse ETFs. These are not investments; they are short-term trading instruments designed for day traders, and their internal mechanics can destroy capital over time. Looking at the real contenders, a clear picture emerges.

Here’s a snapshot of the top-tier performers as of mid-2025. Notice a theme?

Top Performing ETFs (5-Year Annualized Returns as of July 2025)

• VanEck Semiconductor ETF (SMH): ~28%
• iShares Semiconductor ETF (SOXX): ~26%
• Vanguard Information Technology ETF (VGT): ~22%
• Invesco QQQ Trust (QQQ): ~20%
• Invesco S&P 500 Momentum ETF (SPMO): ~19%

(Note: All performance data is approximate and for illustrative purposes. Sources include analysis of data from ETF.com and Morningstar.)

The dominance is staggering. But simply knowing *what* won is useless without understanding *why* it won—and what that means for your money now.

The Engine Room: Why Tech and Semiconductors Dominated

The last five years weren't just a bull market; they were a technology-fueled rocket launch. This performance was driven by a handful of powerful forces, primarily the explosion in Artificial Intelligence and the continued dominance of mega-cap tech giants.

The story is impossible to tell without mentioning Nvidia. Its meteoric rise, with its stock soaring over 150% through mid-2024 alone, acted as a primary engine for the entire semiconductor sector. When one company becomes that critical to the AI revolution, any ETF holding a significant position in it was bound for glory.

"The last five years have been dominated by US large-cap growth and technology stocks, which heavily influenced ETF performance."

Dave Nadig Chief Investment Officer, ETF Trends

This explains why funds like SMH and SOXX, which are heavily concentrated in semiconductor companies, have wildly outpaced even broad tech funds like QQQ. You weren't just betting on tech; you were betting on the picks and shovels of the digital gold rush.

The Four Horsemen of Risk: Why Chasing Winners Fails

Buying an ETF from the list above might feel like a genius move. In reality, you could be stepping onto a battlefield just as the tide is about to turn. Here are the traps waiting for you.

1. Reversion to the Mean: This is the financial equivalent of gravity. What goes up, especially at the parabolic rates we've seen in some sectors, eventually comes back down to earth—or at least stops ascending. Historical data is littered with examples of chart-topping sectors that became the next decade's biggest losers. Sector leadership rotates.

"Reversion to the mean means that high-flying sectors or stocks often underperform in subsequent periods."

Rick Ferri Investment Advisor and Author

2. Concentration Risk: Top-performing ETFs are almost always dangerously concentrated. The SMH, for example, has a massive allocation to just one or two companies. This isn't diversification; it's a highly leveraged bet on a single industry and a few key players. If the semiconductor industry hits a snag, there is no buffer. Your portfolio takes a direct hit.

"Concentration risk is a major concern with top-performing ETFs, as they often rely heavily on a few stocks or a single industry, increasing volatility."

Ben Johnson Director of Global ETF Research, Morningstar

3. Valuation Risk: By the time an ETF has a five-year track record of stellar returns, the assets inside it are almost certainly expensive. You are paying a premium for that performance history. Buying stocks with sky-high price-to-earnings ratios is a bet that incredible growth will continue unabated. That's a fragile bet.

4. Hype Cycle Risk: Thematic ETFs are the poster child for this. Remember the ARK Innovation ETF (ARKK)? It was the king of the world in 2020, only to suffer a catastrophic collapse. While some themes like AI have performed well recently, most thematic funds focused on clean energy, genomics, or "disruptive innovation" have dramatically underperformed broad indexes over the last five years. They sell a great story, but the returns often fail to materialize once the hype fades.

The Professional's Playbook: A Smarter Way to Select ETFs

So if you don't chase performance, what do you do? You build a portfolio like a professional: with discipline, a focus on costs, and a clear strategy. You stop playing checkers and start playing chess.

The most durable strategy is known as "Core and Explore."

Your Core (typically 80-90% of your portfolio) should be built on a foundation of low-cost, broadly diversified ETFs. Think of funds that track the S&P 500, a total world stock market index, and aggregate bond indexes. This is your financial bedrock. It’s boring, and that’s why it works.

Your Explore allocation (the remaining 10-20%) is where you can make tactical decisions. If you have a strong conviction about a specific sector like semiconductors or healthcare, this is where you place that bet. You do it with a small, defined portion of your capital, fully understanding that these bets carry higher risk and could fail.

"The core and explore portfolio construction strategy involves a majority in low-cost, broadly diversified ETFs and a small tactical portion for themes or sectors."

Noel Archard Global Head of ETFs and Portfolio Solutions, AllianceBernstein

When evaluating any ETF, for your core or your exploration, you ignore 5-year returns and focus on these metrics instead.

• Expense Ratio (ER): This is the single most reliable predictor of future returns. For your core holdings, you should be looking for ERs under 0.10%; many excellent broad market ETFs now charge as little as 0.03%. Thematic and active funds often charge over 0.75%, a massive hurdle to overcome.
• Liquidity (AUM & Volume): Look for funds with Assets Under Management (AUM) above $500 million and high average daily trading volume. This ensures you can buy and sell efficiently without massive price swings, and it reduces the risk of the fund provider shutting it down.
• Tracking Difference: How well does the ETF actually follow its stated index? A fund that consistently lags its benchmark, even after accounting for its expense ratio, is being managed poorly.
• Underlying Holdings: Look under the hood. Don't just buy "technology." See what's actually inside. Is it 25% in one stock? Is it the tech you actually want exposure to? This is where you spot the concentration risk before it bites you.

Analysis

The story of the last five years is one of extreme concentration. The rise of a few mega-cap technology stocks, supercharged by the AI narrative and a low-interest-rate environment in the earlier part of the period, created a performance gap unlike almost any other in modern market history.

An investor who simply owned a broad S&P 500 index fund did very well. An investor who owned a Nasdaq-100 fund like QQQ did even better. But an investor who owned a semiconductor-focused fund like SMH did spectacularly well.

This creates a dangerous psychological bias. Investors now see this narrow leadership as the new normal. They extrapolate the recent past into the indefinite future, forgetting every lesson about market cycles. The very factors that drove these returns—manic sentiment around AI, stretched valuations, and massive fund inflows—are the same factors that increase the potential for a sharp correction.

While the US has been the place to be, it's worth remembering that global markets offer diversification. Even if international ETFs haven't topped the 5-year charts, ignoring them completely is a strategic error driven by recency bias.

The smart money isn't asking which ETF will repeat its performance. It's asking which sectors are currently unloved, undervalued, and positioned to lead the *next* five years. The answer is rarely the one that's plastered all over the headlines today.

Final Thoughts

It's tempting to look at a list of top-performing ETFs and feel like you've discovered a cheat code for the market. You haven't. You've just read the last chapter of a book that's already finished.

Building real, lasting wealth isn't about finding the next high-flyer. It's about building a resilient, all-weather portfolio that can withstand the inevitable market storms and shifting economic winds. It's about discipline, diversification, and a relentless focus on keeping your costs low.

Stop chasing performance. Use an ETF screener to filter by what actually matters: low expense ratios, high liquidity, and a strategy that aligns with your long-term goals. Build your core portfolio with boring, reliable funds. If you must, use a small, carefully considered portion of your capital to explore the themes you believe in.

This approach may not give you the thrill of owning the hottest fund of the year. But it will give you something far more valuable: a higher probability of reaching your financial goals without being wiped out by the next market rotation. All investments involve risk, including the possible loss of principal, but a sound strategy is your best defense.

Did You Know?

Performance charts for ETFs are often skewed by something called survivorship bias. These lists only include the funds that still exist today. They don't show the hundreds of thematic or niche ETFs that were launched with great fanfare, failed to attract assets, performed poorly, and were quietly shut down. You are only seeing the winners of a race where most of the competitors didn't even finish.

This content is for informational and educational purposes only. It is not intended to be a substitute for professional financial advice. Always seek the advice of a qualified financial professional before making any investment decisions.