BlackRock’s Model Portfolio Magic: Transforming a Sleepy ETF into an Investing Juggernaut
A Billion-Dollar Cinderella Story
LA News Center has uncovered an intriguing story behind a once-modest exchange-traded fund (ETF) called the U.S. Equity Factor Rotation ETF (DYNF). Until recently, DYNF was a quiet performer, managing less than billion in assets. Then, like a Cinderella waiting for her prince, a small yet strategic tweak changed its fate.
BlackRock’s Model Portfolio Magic
In January, BlackRock, the world’s largest asset manager, included DYNF in its target allocation model portfolio. This decision was a game-changer. Investors flocked to DYNF, snapping up more than billion in just the final days of January. The surge continued unabated, with another billion pouring in within a week in March.
DYNF has attracted more funds ever since, and its assets under management (AUM) now stand at an impressive .7 billion. This growth is a testament to the increasing popularity of both model portfolios and active ETFs.
Model Portfolios and the Active ETF Revolution
Model portfolios are investment strategies designed by asset managers that divide a portfolio into distinct categories, such as stocks, bonds, or real estate. The money is then invested in funds that fit those categories, often managed by the same asset managers.
Active ETFs, on the other hand, are funds that actively track or outperform a specific benchmark or index. They allow investors to access more sophisticated investment strategies without having to build their own portfolios.
DYNF: An Active ETF with a Winning Formula
DYNF is an active factor rotation fund that identifies companies with favorable characteristics based on historical investing factors such as quality, size, and momentum. The fund then adjusts its exposure to these factors based on what its management team believes will drive future performance. For instance, in April, DYNF reduced its exposure to expensive stocks in favor of a more balanced approach with value-oriented plays.
Some of DYNF’s top holdings include tech giants Microsoft and Nvidia, along with financial heavyweights Visa and Berkshire Hathaway. Its success is evident in its recent performance, outpacing broader market benchmarks like the iShares Core S&P Total U.S. Stock Market ETF (ITOT) and iShares Core S&P 500 ETF (IVV).
The Rise of Active ETFs and Model Portfolios
Thanks to regulatory changes and increasing investor interest, the number of active ETFs in the U.S. has skyrocketed since 2019, now constituting nearly 10% of all ETFs. Model portfolios have also gained momentum, with nearly 4 billion invested as of June 2023.
This convergence has made it more challenging for investors to discern the inner workings of model portfolios at a glance. Elisabeth Kashner, Director of Exchange-Traded Fund Research and Analytics at FactSet, emphasizes that “More due diligence is required from the end user to truly understand why models are structured in a particular way.”
The Cost and Risk Considerations
Active strategies typically come with higher fees than passive funds. DYNF is no exception, with its 0.30% expense ratio compared to IVV and ITOT’s modest 0.03%. Moreover, active management can lead to greater volatility and underperformance, as was the case with DYNF in 2020, 2021, and 2022.
In the context of model portfolios, including active funds may not always lead to the best performers. The fund managers with the strongest track records may be working with competitors. As Kashner points out, model portfolios with limited choices within an asset manager’s offerings may not always select the most suitable ETF for specific use cases.
Conclusion
The inclusion of DYNF in BlackRock’s model portfolio is a fascinating example of how a small change can have a profound impact on the investment landscape. It highlights the growing popularity of both model portfolios and active ETFs. Investors should be aware of the potential costs and risks associated with these strategies to make informed investment decisions. By carefully evaluating the underlying components and fee structures of model portfolios and active ETFs, investors can reap the benefits of these innovative investment tools.
Data sourced from: cnbc.com
