The Market's Hottest Active ETF Has Yet to Meet Its Biggest Test -- Barrons.com

By Ian Salisbury

With its $31 billion iShares U.S. Equity Factor Rotation Active exchange-traded fund, BlackRock has a major hit on its hands. But the fund's biggest test may be yet to come.

BlackRock has long been the 800-pound gorilla of the ETF industry, with more than $5 trillion in assets. But when it comes to active ETFs, the indexing powerhouse has long been an also-ran, far behind players like J.P. Morgan and Dimensional Fund Advisors.

That's changing. The Factor Rotation ETF -- often referred to by its ticker, DYNF -- snagged nearly $14 billion in net new investor dollars last year, more than any other active ETF, according to Morningstar.

Of course, if you want to become a star, having influential parents helps. At least part of DYNF's inflows come from being included in BlackRock model portfolios that are popular with financial advisors, according to several industry sources. But the ETF also has a record any fund would envy -- average annual total returns of 15% over the past five years, compared with 13.6% for the S&P 500 index.

The returns are even more remarkable when you consider its strategy. Unlike many active mutual funds, DYNF doesn't aim to pick individual stock winners.

Instead, it uses a data-driven proprietary model to "rotate" between -- essentially to surf -- market trends, known as factors. These include value (stocks with low price/earnings ratios), quality (stocks with strong balance sheets and profits), and momentum (steadily rising prices).

BlackRock says the fund "tilts toward factors exhibiting tailwinds over a three- to six-month horizon. As market leadership begins to rotate, the model is designed to gradually reduce exposure to factors and stocks facing emerging headwinds while increasing exposure where fundamentals and market dynamics are improving."

Of course, the ETF universe boasts dozens of factor funds, including many from iShares. In a stock market largely driven by excitement over artificial intelligence and the Magnificent Seven tech stocks, these have been long out of fashion.

Factor investing grew out of academic research by economists like Eugene Fama and Kenneth French. Traditionally, strategies tend to emphasize small-cap value stocks, which have lagged behind the market in recent years.

Over the past five years, the iShares MSCI USA Value Factor ETF has returned just 11.7% a year on average. Others have fared even worse. A similar iShares fund targeting small-caps has returned just 9% a year, while one that focuses on low-volatility stocks has returned just 8.3%.

The secret of iShares U.S. Equity Factor Rotation Active ETF's success? Like so many other funds that have beaten the market recently, it has taken huge bets on technology and communications stocks, which represent 52% of its portfolio, compared with 45% for the S&P 500. The fund's top three holdings are Nvidia, at 8.4% of assets; Apple, 7.6%; and Microsoft, 6.3%.

All that just raises what for DYNF will be the $64,000 question: Will this factor rotation fund ultimately be able to nail the next "Great Rotation" -- the moment when Al-driven growth stocks finally fall out of favor, and long-suffering value and small-cap names finally look like winners again?

"In the case of a downturn, presumably BlackRock would try to rotate the fund into more defensive factors, but timing that rotation correctly is not easy," says Aniket Ullal, head of ETF research and analytics at CFRA Research. "It remains to be seen."

The new year may already be providing something of a test case. So far in 2026, value stocks have been enjoying a resurgence. The iShares MSCI USA Value Factor ETF has returned 4.5%, while the overall market is down 0.6%.

And the iShares U.S. Equity Factor Rotation Active ETF has failed to perform the two-step that investors might have hoped for. It's down about 1.5%.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 22, 2026 02:30 ET (07:30 GMT)

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