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FUNDS: These Models Are the Ugly Kind

July 12, 2021 By E.J. Smith

By ArtFamily @ Shutterstock.com

You have here yet another reason why certain exchange-traded funds and mutual funds are dangerous because MODELS break. That’s when things get ugly. Dawn Lim reports in The Wall Street Journal what happened when some BlackRock models were altered. She writes:

When BlackRock told brokerages that it had tweaked rules around its flagship model portfolios in late May, that set in motion synchronized buying and selling across its own funds. A BlackRock fund that tracks financial stocks took in a record influx of money for a day too. As part of changes on the week of May 26, BlackRock also cut the bond fund positions of several portfolios. It pared back some positions in a BlackRock medical devices ETF, spurring a record one-day outflow for that fund.

It said in the June note to advisers that the medical devices ETF position was an example of a trade that had lifted returns during the worst of the pandemic, but now appeared “less attractive in a hypergrowth, rising rate regime.”

Other model portfolios have driven similar trades. Model activity steered money from bond funds to other strategies such as commodity funds, real-estate investment trusts, and emerging market bonds. That is what Envestnet, which runs a platform that delivers outside model portfolios to advisers, noticed in the first six months of 2021. There was about $115 billion invested in model portfolios through the platform in March.

BlackRock took a 4.9% stake in Envestnet in 2018 in a deal that deepened the ties between both firms.

As models become a bigger force, they are challenging the idea that moves across funds reflect the hive mind of millions of people making decisions on their own. Instead, the moves may reflect the views of an individual firm.

“The concern is that somebody would look at an ETF today and think there is a broader following than it actually has,” said Todd Rosenbluth, head of exchange-traded-fund and mutual-fund research at CFRA.

After BlackRock made its changes to its flagship model portfolios, the collective costs for an investor tracking the most popular version was 0.17%—$17 per year for every $10,000 invested—as of the end of May. That is up from 0.16% before the adjustments, the spokeswoman said.

Action Line: Don’t trust your retirement plan to a model created by some company more focused on its executive’s EGO. You invest, but they win. Instead, look for a plan made just for you. If you need help finding the right way forward, I would love to talk with you.

Originally posted on Your Survival Guy.

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E.J. Smith
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris.

Please get in touch with E.J. at ejsmith@youngresearch.com
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