Locked at 1-1 with 12 minutes remaining at the Santiago Bernabeu, Ancelotti swapped Isco for Asier Illarramendi, much to the frustration of Real fans as a chorus of whistles echoed around the stadium.
Isco has become an integral part of Real's star-studded line-up, with Ancelotti claiming the Spaniard's place is "non-negotiable".
However, Ancelotti felt his decision to substitute Isco on Sunday was in the best interests of the team, even if it was not a popular one.
"A manager is down there on the pitch to make changes, because he thinks that they are for the good of the team," Ancelotti said afterwards.
"If the fans don't understand it, well I'm sorry, but I made the decision in order to give more balance to the team."
A lacklustre Real were far from their best against Villarreal in the capital as their lead atop of La Liga was cut to two points.
The home side took a 52nd-minute lead courtesy of a successful Cristiano Ronaldo spot-kick but Villarreal hit back through Gerard Moreno 12 minutes later.
Villarreal were a threat up until the final whistle as Ancelotti lamented his side's lack of intensity throughout.
"There were two parts. The first, in which we played at too slow a rhythm, we didn't create the chances apart from crosses into the centre, the ball moved around too slowly," the Italian said.
"In the second half things picked up a little; we had chances, but weren't effective converting them. But we had our opportunities."
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