BlackRock just launched the first ETF that bears its name rather than the iShares moniker. The BlackRock U.S. Equity Factor Rotation ETF (DYNF) is one of two factor ETFs that the world’s largest asset manager introduced on Thursday; the other is the iShares Focused Value Factor ETF (FOVL).
“If you need higher returns than a market cap index or want like returns [to an index] with reduced risk, then factors have a role to play in your portfolio,” said Andrew Ang, head of factor strategies at BlackRock at a meeting with reporters. “Factors are active,” said Ang. They “embody the best of active management” and look toward “what really matters and drives returns.”
Holly Framsted, head of U.S. Factor ETFs at BlackRock, said these and other factor ETFs are for investors who have a “proclivity to active management.”
DYNF is a diversified U.S. equity ETF with exposure to five diverse factors: value, momentum, minimum volatility, size and quality. It uses a dynamic approach to rotate factor exposures, based on outlooks for valuations, relative strength, dispersion and economic conditions.
The ETF can add value in two ways — via long-term exposure to factors and incremental return through the timing — or rotating — of certain factors, said Ang. DYNF has an expense ratio of 30 basis points and is currently overweight quality and underweight value, which tends to underperform in late-stage economic cycles, like the current one. BlackRock expects to adjust positions within DYNF monthly, with an annual turnover between 80% and 100%.
FOVL, which charges 25 basis points, is a concentrated, high-conviction portfolio of about 40 large- and mid-cap U.S. caps within the Russell 1000 Value Index. It chooses stocks with low market valuations relative to fundamentals and seeks to avoid value traps by favoring companies with high-quality earnings and eschewing stocks with limited upside potential based on risk, leverage and research analyst sentiment.
It can rebalance when needed, on a “contingent” basis, rather than annually, which is more traditional. If value stocks perform poorly, as they tend to do late in the economic cycle, FOVL is likely to perform poorly, too.
The economic cycle is just one of several key major considerations included in BlackRock’s systematic framework for factor investing. The others are valuation — whether a given factor is cheap or rich — and dispersion, whether there are large or small differences between value and growth.
— Related on ThinkAdvisor: