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 desgined 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.

The Russell 1000 Value Index peaked in early June and since then fell 1.8% through Tuesday. Meanwhile the tech giants MTUM sold in May like Netflix Inc. have rallied. The equivalent growth gauge rose around 10% in the same period.

In a note to clients on Tuesday, BlackRock’s Head of Factor Investing Strategies Andrew Ang made the case for momentum -- and MTUM -- as a key way to keep track of market trends. And at times of extremely high volatility, MTUM has the ability to change its holdings more frequently, he wrote.

“Momentum is unique in that it’s a chameleon factor, adapting to markets and providing a lens into deeper and more robust trends,” a BlackRock spokesperson said by email. “MTUM is a transparent exchange-traded fund, whose holdings are publicly available and represent important market information. Investors can use momentum alongside other factors for additional diversification.”

Of course, if the cyclical rotation revives, MTUM will be well-placed to capitalize. Many on Wall Street think the reflation trade will recover, even as investors appear to be scaling back their expectations. MTUM was 0.8% higher as of 9:42 a.m. in New York on Wednesday.

Meanwhile, the fund’s scheduling headaches are far from unique. In the $1.4 trillion smart-beta universe, almost 20% of funds rebalance semiannually, according to Bloomberg Intelligence. About one in 10 adjusts annually.

That meant the huge market rotation since the first Covid vaccine breakthrough in November set up a series of major index adjustments that played out in recent months. MTUM’s was simply the most eye-catching.

“MTUM’s returns since the end of May reveal a potential shortcoming with smart beta: the reliance on a specific rebalance schedule,” BI analysts Athanasios Psarofagis and Eric Balchunas wrote this week. The pair predict future launches will tend toward “more active-like factor ETFs that don’t have to overhaul portfolios on a specific date.”

--With assistance from Justina Lee.

This article was provided by Bloomberg News.