Building off its current roster of factor-based exchange-traded funds (ETFs), BlackRock added two new funds on Thursday–the actively-managed BlackRock U.S. Equity Factor Rotation ETF (DYNF) and the iShares Focused Value Factor ETF (FOVL).
DYNF seeks to outperform the investment results of the large- and mid-capitalization U.S. equity markets by providing diversified and tactical exposure to style factors via a factor rotation model. FOVL focuses on U.S. large- and mid-capitalization stocks with prominent value characteristics.
DYNF and the Factor Rotation Model
Branded under the BlackRock name, DYNF is composed of primarily large-cap and midcap U.S. equities. The DYNF model uses five commonly-used equity style factors: momentum, quality, value, size and minimum volatility.
The model then uses these factors and dynamically allocates them, emphasizing those factors with the strongest near-term return prospects. The model also incorporates two potential sources of income: long-term return premium and short-term returns from timing the cyclical behavior of each individual factor.
Using this information, the model then extrapolates data from the current economic cycle as well as the valuations and recent trends for each factor. This information is used to compare the relative attractiveness of each factor and to guide the portfolio to tilt into favorable factors and away from unfavorable factors in pursuit of incremental returns.
Factor allocations are then capped at 35 percent, but maintains flexibility with the active management component. DYNF comes with an expense ratio of 0.30 percent and will list on the NYSE Arca.
DYNF is BlackRock’s first ETF that uses its namesake versus iShares.
FOVL Zeroes in on Value
With 2018’s year-end sell-offs in U.S. equities, investors are giving value investing a closer look in 2019. A byproduct of a shift to value is a focus on being selective and using due diligence as screeners to find the best-performing investments.
Branded under the iShares name, FOVL seeks to track an index derived from the Russell 1000 Index. The top 10 percent of constituents are screened out based on 12-month realized volatility followed by a screener that takes the top 10 percent of constituents with the most leverage.
According to the prospectus, companies with negative sentiment scores are sought for exclusion, which are based on the prospective earnings per share estimates for the current and following fiscal year. From there, FOVL gives the remaining selections a value score based on four value factor criteria; price-to-book, price-to-dividend, price-to-earnings and price-to-cash flow from operations.
40 of the highest-scoring companies make up the target composition of FOVL and are equally weighted. Rebalancing occurs after monthly reviews of the original 40 stocks and adjustments are made as necessary.
That fund comes with an expense ratio of 0.25 percent and also lists on the NYSE Arca.
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