A $15.3 Billion Quant ETF Loses Out in Badly-Timed Rebalance

A comeback by megacap growth stocks and the stalling of the value trade arrived at exactly the wrong moment for one $15.3 billion exchange-traded fund.

BlackRock Inc.’s iShares MSCI USA Momentum Factor ETF (ticker MTUM) went all-in on the reflation trade back in May. It has barely edged higher since then as the cheap, cyclically sensitive shares it piled into struggled.

A basket matching its previous allocation is up about 10%, according to Bloomberg Intelligence.

The missed returns are a measure of the fickle markets this year that have left Wall Street divided over whether the reopening trade has run its course. There’s a lot of cash at stake: Investors plowed almost $55 billion into value ETFs in the first half before flows ground to a halt this month.

It’s also a demonstration of one of the key questions at the heart of index investing -- when and how should a fund rebalance? Too often, and costs ramp up. Too seldom and it fails to keep pace with the market.

The timing of MTUM’s adjustment is determined by the index it follows, a quant-based strategy designed to track the market’s top performers of the past six and 12 months. So in late May it followed the index, boosting its allocation to financial stocks and slashing exposure to technology companies.

The problem is that the semiannual rebalance didn’t come soon enough, creating a double blow. The fund held tech stocks longer than peers when they were underperforming, then it switched to value shares at their peak.