(Bloomberg) -- Kraft Heinz Co.’s precipitous plunge is making quants uncomfortable.

The owner of the Oscar Mayer trademark, which fell as much as 27 percent Friday, is found in many U.S. exchange-traded funds that employ factor-based strategies focused on capturing dividends, avoiding volatility or identifying underpriced stocks. The decline highlights the pitfalls in slicing and dicing the equity market by looking at a stock’s characteristics.

So-called smart-beta strategies have exploded over the last few years, with asset managers including BlackRock Inc., State Street Corp. and Invesco Ltd. all starting indexed funds that try to beat the market by leveraging quantitative analysis to construct their benchmarks. However, these tools tend to be backward looking -- evaluating the dividends that a company has already paid, for example -- rather than projecting the future. That leaves them vulnerable to an abrupt turn in a company’s fortunes.

“Not all smart-beta products are created equal,” said Matt Schreiber, president and chief investment strategist at WBI Investments. “They can be so simplistic in terms of ‘I’m taking the bottom third of stocks in the S&P 500, the lowest beta, the lowest volatility stocks,” he said, adding “that doesn’t mean upcoming they’re not going to have volatility.”

On Thursday, Kraft wrote down the value of some of its best-known brands by more than $15 billion as it unveiled fourth-quarter earnings that lagged all analyst estimates and flagged a subpoena from regulators. It also cut its quarterly dividend to 40 cents a share, down from 62.5 cents.

While broader ETFs own more of Kraft in terms of dollars, the $329 million First Trust Consumer Staples AlphaDEX Fund -- which screens consumer stocks for growth and value -- allocates a larger proportion of its assets to Kraft than any other ETF, with 5.75 percent. It more than quadrupled its position in Kraft over the last year while the second-largest allocator, a dividend ETF, only added Kraft to its portfolio in August, data compiled by Bloomberg show.

Of course, index trackers are designed to diversify an investor’s risk across scores of companies. But the quants aren’t the only ones watching to see whether it gets worse. Warren Buffett -- a long term fan of indexed funds -- also owns a large stake.

To contact the reporters on this story: Rachel Evans in New York at revans43@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Rachel Evans

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