A small tweak in BlackRock’s model portfolio turned a sleepy fund into one of the market’s fastest growing active ETFs overnight. BlackRock added the U.S. Equity Factor Rotation ETF (DYNF) to its target allocation model portfolio in January. The fund, which had less than $1 billion in assets and was lightly traded, suddenly brought in more than $2 billion in the final days of January, and then another $3 billion in net inflows in less than a week in March. The fund has been steadily attracting more cash since then and now has AUM of nearly $7.7 billion, according to FactSet. The growth of DYNF sits at the center of two broader trends — rapid growth of model portfolios and the proliferation of active ETFs. Model portfolios are strategies offered by asset managers to investors and financial advisors. The offerings divide up a portfolio into different asset buckets, with the money then invested into funds that fit those categories. The funds often are run by the same asset managers. “The inclusion of active ETFs in our toolkit provides our models access to both single security selection expertise and exposure to parts of the market that are not available through existing vehicles,” Michael Gates, lead portfolio manager for BlackRock’s Target Allocation ETF model portfolio suite, wrote in March. So far the move is working out for investors. The fund is up about 1.6% since March 15, compared to about 1.2% for the iShares Core S & P Total U.S. 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 total return of 36% compared to roughly 27% for the two BlackRock index funds. DYNF 1Y mountain This active factor rotation 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 The stated goal of DYNF is to identify companies that score well on historical investing factors — including quality, size and momentum. The fund then shifts its exposure between those factors based on what the management team expects will drive performance in the future. For example, the fund dialed back its exposure to expensive stocks to be more balanced with value plays in April, according to a product brief. Its top holdings as of May 7 include some of the biggest tech companies, like Microsoft and Nvidia , as well as financials liked Visa and Berkshire Hathaway . Mixing active funds and model portfolios Thanks in part to regulatory changes, the share of US ETFs that are active has more than quadrupled since 2019 and is now nearly 10%, according to Morningstar. Model portfolios have seen a similar trajectory. Morningstar said in a report earlier this year that there were $424 billion tied to model portfolios as of June 2023, up $286 billion from two years earlier. As these two grow together, it can become more difficult for investors to tell at a glance what they are getting from a model portfolio, said Elisabeth Kasner, director of exchange traded fund research and analytics at FactSet. “More due diligence is required from the end user, whether that’s the financial advisor or the investor himself or herself to really figure out why the models are put together the way that they are,” Kasner said. Costs and risks Active strategies usually come at a higher fee point than passive funds. DYNF is no different, with an expense ratio of 0.30% compared to 0.03% for IVV and ITOT. Stock picking can also result in big swings and underperformance. DYNF has a 1-year beta of 1.1, according to FactSet, implying that the fund often moves more than the broader market in either direction. And even though the fund has been a winner lately, it did underperform many of its peers in 2020, 2021 and 2022, according to Morningstar. Meanwhile, model portfolios that want to add active management may not be able to add the best-performers in a category. The top fund managers could instead be working for a competitor. “Something that’s choosing in house funds, by definition, is limited in the scope of choices that it has. It’s not necessarily picking the single best ETF for every use case, but rather picking among the asset manager’s offerings,” Kasner said. Correction: BlackRock added the U.S. Equity Factor Rotation ETF (DYNF) to its target allocation model portfolio in January. The fund brought in more than $2 billion in assets in the final days of January. An earlier version of this story misstated the timing.