ETFs
BlackRock transferred billions into this active ETF
A small tweak in BlackRock’s model portfolio transformed a sleepy fund overnight into one of the fastest-growing active ETFs on the market. BlackRock added the US Equity Factor Rotation ETF (DYNF) to its Target Allocation Model portfolio in January. The fund, which had assets of less than $1 billion and was thinly traded, suddenly brought in more than $2 billion in the final days of January, then another $3 billion in less than a week in March. Since then, the fund has steadily attracted more cash and now has assets under management of nearly $7.7 billion, according to FactSet. DYNF’s growth sits at the center of two broader trends: the rapid growth of model portfolios and the proliferation of active exchange-traded funds. Model portfolios are strategies offered by asset managers to investors and financial advisors. The offerings divide a portfolio into different asset categories, with money then invested in funds corresponding to those categories. The funds are often managed by the same asset managers. “Including active ETFs in our toolbox allows our models to access both unique stock picking expertise and exposure to parts of the market not available through vehicles “, Michael Gates, lead portfolio manager for BlackRock’s suite of target allocation ETF model portfolios, wrote in March. So far, this move is working out well for investors. The fund is up about 1.6% since March 15, compared to about 1.2% for the iShares Core S&P Total US Stock Market ETF (ITOT) and 1.3% for the iShares Core S&P 500 ETF (IVV). The fund is also outperforming over the past 12 months, with a total return of 36%, compared to around 27% for the two BlackRock index funds. DYNF 1Y mountain This actively factor-rotated fund has outperformed some of BlackRock’s cheaper index ETFs over the past year. But most active strategies underperform the market in any given year and often cost more than their passive counterparts. Their use of model portfolios creates even more active choice, both in asset allocation and within the funds themselves. About DYNF DYNF’s stated goal is to identify companies that perform well based on historical investment factors, including quality, size and momentum. The fund then shifts its exposure between these factors based on what the management team believes will drive performance in the future. For example, the fund reduced its exposure to expensive stocks to be more balanced with value stocks in April, according to a product presentation. Its top holdings as of May 7 included some of the biggest tech companies, like Microsoft and Nvidia, as well as financial stocks like Visa and Berkshire Hathaway. Mixing active funds and model portfolios Thanks in part to regulatory changes, the share of active U.S. ETFs has more than quadrupled since 2019 and now stands at nearly 10%, according to Morningstar. Model portfolios have experienced a similar trajectory. Morningstar said in a report earlier this year that as of June 2023, $424 billion was tied to model portfolios, up $286 billion from two years earlier. As the two grow together, it may become more difficult for investors to know at a glance what they’re getting from a model portfolio, said Elisabeth Kashner, director of research and investment. analysis of exchange-traded funds at FactSet. “Greater due diligence is required from the end user, whether that be the financial advisor or the investor themselves, to truly understand why the models are built the way they do,” said Kashner. Costs and risks Active strategies generally have higher fees than passive funds. DYNF is no different, with an expense ratio of 0.30% compared to 0.03% for IVV and ITOT. Stock selection can also lead to sharp swings and underperformance. DYNF has a one-year beta of 1.1, according to FactSet, implying that the fund often moves more than the broader market in either direction. And while the fund has been a winner lately, it has underperformed many of its peers in 2020, 2021 and 2022, according to Morningstar. Meanwhile, model portfolios that want to add active management might not be able to add top performers in a category. Top fund managers might instead work for a competitor. “Something that chooses internal funds, by definition, is limited in the scope of choices it has. It’s not necessarily about choosing the best ETF for each use case, but rather choosing among the offerings of the asset manager,” Kashner said. Correction: BlackRock added the US Equity Factor Rotation ETF (DYNF) to its Target Allocation Model portfolio in January. The fund collected more than $2 billion in assets in the final days of January. An earlier version of this story misstated the timing. Elisabeth Kashner, director of exchange-traded fund research and analysis at FactSet. An earlier version misspelled his name.