2025 in Review

2025 was another exciting and successful year for Economic Index Associates (EIA). Each of our standard non-customized indexes beat their benchmarks and we launched our sixth customized Invest with the Fed (IFED) index in December 2025. EIA’s six customized offerings are designed to meet unique client specifications and consist of three large-cap indexes, two target volatility indexes, and a low volatility index. Total money tracking EIA indexes now exceeds $750 million.

EIA tracks performance for a suite of five standard, non-customized portfolios, which are presented to clients as a starting point to customize indexes that match their unique needs. 2025 performance for those five standard portfolios is shown in Exhibit 1.

Exhibit 1. 2025 Performance for EIA’s Suite of Standard IFED Portfolios

As shown in Exhibit1, each of the five standard IFED portfolios produced a positive alpha in 2025. Outperformance ranged from 1.23% for our low volatility portfolio (IFED-LV) to 9.91% for our small-cap portfolio (IFED-S). While IFED-M and IFED-S achieved the highest alphas in 2025 (9.63% and 9.91%, respectively), IFED-LG and IFED-A produced the highest total returns of 19.29% and 18.59%, respectively. The discrepancies between total returns and alphas across these portfolios are largely explained by the strong performance of the Magnificent Seven (Apple, Microsoft, Nvidia, Alphabet, Meta, Tesla, and Amazon) in 2025. We will discuss this issue further below.

Merits of the IFED Strategy

The IFED strategy, which underlies EIA’s investment approach, uses twelve firm financial characteristics to select stocks that are best positioned for prevailing market conditions. Federal Reserve policy actions are used to identify shifts in prevailing market conditions, and allow us to appropriately apply the twelve metrics in effectively guiding the stock allocation process.

The twelve IFED metrics represent firm fundamentals and are devoid of speculative elements and emotional considerations. Instead, the twelve metrics emphasize aspects of firm quality and financial stability. Speculative elements are a significant contributor to glamour stock valuations; thus, such stocks are under-represented in IFED portfolios regardless of the market environment. For example, the median P/E ratio for the Magnificent Seven is 35 and none of these stocks appear in the top holdings of any IFED portfolio. The high P/E ratios indicate investors are counting on continuing above average growth for the seven stocks. Given that the Mag 7 already represent over 40% of the S&P 500, we suspect their superior stock performance, like that of the ‘Nifty Fifty,’ is likely to wane in future periods. Indeed, as shown in Exhibit 2, it was the performance of only two Mag 7 stocks (Nvidia and Alphabet) that outperformed the S&P 500 in 2025.

Exhibit 2: Magnificent Seven Returns in 2025

Despite underweighting the Mag 7 stocks during recent years, the IFED portfolios have outperformed even during the recent unprecedented run exhibited by the Seven. This evidence further validates the merits of the selection process applied by the IFED strategy.

History has shown that long-term stock performance is determined by firm fundamentals. The IFED strategy extends this doctrine by selecting stocks with solid fundamentals that are optimally aligned with prevailing market conditions. That is, in the portfolio allocation process, the IFED strategy combines a timeliness element along with quality and stability aspects.

Long-term Performance of IFED Portfolios

The outperformance of IFED portfolios in 2025 aligns with their long-term performance and offers support for the IFED strategy’s general applicability. Figure 1 and Exhibit 3 show outperformance (annual alpha) for EIA’s suite of standard, non-customized IFED portfolios. Outperformance relative to each portfolio’s benchmark is shown for periods ranging from 1 year to 20 years.

Figure 1: Outperformance for IFED Portfolios

Exhibit 3: Outperformance (Annual Alpha) for IFED Portfolios by Holding Period (through Dec. 2025)

A strategy’s relevance for the future is best gaged by examining its performance across alternative dimensions. The consistency of outperformance across stock style and holding period offers strong validation for the merits of the IFED investment strategy. Over the past 20 years, the five IFED portfolios produced annual outperformance ranging from 3.60% for our low volatility index to 6.01% for our mid-cap index. Furthermore, strong performance occurred consistently across the alternative holding periods and continued through 2025. As the data confirms, positive alphas are documented across a diverse range of equity types and periods.

Outperformance is consistently strong across the five portfolios and five holding periods; however, the past three years has witnessed some reduction in the level of outperformance for IFED-LG and IFED-A. The benchmark for each of these indexes is heavily influenced by the performance of the Mag 7, which now account for more than 40% of S&P 500 weight. As noted previously, the IFED strategy underweights glamour stocks, whose valuations are comprised of considerable speculative components, and therefore, the unprecedented runup in Mag 7 valuations has been challenging to match. Despite this challenge, the IFED portfolios have continued to produce positive alphas and are positioned to continue their superior run.

The IFED Strategy Risk Profile

While the EIA team is proud of the superior returns produced by the IFED strategy, we are equally proud of the strategy’s ability to limit periods of underperformance. In designing the IFED strategy, we embraced six basic principles, which are detailed on our website.

·       Ethical conduct is essential

·       Time in the market is crucial

·       Diversification avoids underperformance

·       Excessive turnover hurts performance

·       Following the herd destroys wealth

·       Knee-jerk reactions are harmful

Starting from these basic principles and based on our 30+ years of academic research, we selected our twelve metrics and our market conditions indicator and developed the IFED strategy. The IFED strategy is a non-discretionary, rules-based approach that has been shown to effectively reduce the chances of underperforming the market. By infusing a timeliness dimension to stock quality and stability features, the strategy has shown a unique ability to capture considerable upside when normal return patterns prevail, while limiting downside outcomes when unusual forces drive returns. As evidence of our success in this area, Exhibit 4 reports risk statistics for the five standard IFED portfolios over the past ten years.

Exhibit 4: Risk Profile for IFED Portfolios, 2016 - 2025

* Measured relative to each indexes unique benchmark.

The ten-year period from 2016 to 2025 includes two years of negative market returns, 2018 and 2022, along with a myriad of market challenges including a pandemic, social unrest, foreign wars, fears of trade wars, and inflation spikes. In addition, the period includes four years in which market returns topped 25%, thus, the period contains a diverse mixture of both positive and negative market events. In general, the period serves as an appropriate timeframe to evaluate the IFED strategy’s recent risk profile and its robustness to alternative economic environments.

As illustrated in Exhibit 4, the IFED strategy was effective at limiting downside outcomes, while maintaining the capacity to capture upside potential. For each portfolio, the downside capture is far less than the upside capture value and is less than 100% in all but one case. This evidence confirms that the IFED strategy effectively captures periods of upside market movement, while not exposing investors to abnormal levels of loss. This is atypical for alpha capture strategies, which generally subject investors to higher potential loss in order to capture positive alpha.

While the standard deviation numbers are somewhat elevated relative to passive indexes, the capture values indicate that much of the volatility derives from unusual upside return performance. Thus, the standard deviation misrepresents the loss that would be experienced by an IFED investor. Upside volatility while contributing to standard deviation is a positive aspect of investor performance.

The last three rows in Exhibit 4 offer investors guidance regarding performance expectations and limits. The Positive Alpha Years indicate that two of the IFED portfolios, IFED-M and IFED-LV, produced positive alphas during all ten years of evaluation. The Highest and Lowest Annual Alphas indicate that the potential upside offered by IFED portfolios far exceeded their propensity for underperformance. In all five cases, the IFED portfolios significantly skewed performance in the investor’s favor.  IFED-S was particularly adept in skewing return performance in favor of investors by producing a +36.54% maximum alpha, while limiting the minimum alpha to only -5.42%.

Overall, the findings in Exhibit 4 strongly support the contention that the IFED strategy matches its guiding objective. That is, the strategy prospers during periods when normal return patterns prevail, while limiting underperformance when unusual factors drive returns.

Celebrating Our 2025 Success and Looking Forward to 2026

During 2025, the Federal Reserve continued to lower rates, however, at a slower rate than some investors were hoping for. The Fed showed considerable caution during the year to avoid sparking a resurgence in inflation, which demonstrated considerable stickiness. We anticipate that Fed policy will remain cautious throughout 2026 but will lean toward keeping interest rates low to feed continued economic growth.

For investors in the IFED strategy, 2025 represented another year of outperformance relative to the market benchmarks. The success of the IFED strategy in 2025 served to reward EIA clients with outperformance during what was an uncertain but positive period for the market. The EIA team is confident that the IFED portfolios are positioned for success going forward.

Our initial customized index offering, Nasdaq IFED-L, was launched in June 2020. The index is one of EIA’s U.S. large cap offerings and has now been live for over five years. The EIA team is hoping that 2026 will be the year a client will recognize the merits of our mid-cap and small-cap portfolios and engage with us to launch an index in this space. The evidence reported above suggests these areas represent an untapped opportunity.

Our initial customised index offering, Nasdaq IFED-L, was launched in June 2020 and represents one of EIA’s U.S. large-cap strategies. The index has now been live for more than five years, providing a robust performance and operational track record. As we look ahead to 2026, EIA expects increased institutional engagement with its mid-cap and small-cap indexes. The evidence outlined above indicates that these areas remain underutilized and present a compelling opportunity for index-based solutions.