DENT Blurs Mutual Fund/ETF Line Further

by on September 22, 2009

Earlier this week, the AdvisorShares Dent Tactical ETF (DENT), co-managed by best-selling author and well-known investor Harry Dent, hit the market. The launch of the new Dent fund has drawn attention primarily because of the firepower and starpower behind the fund. But the launch of DENT highlights a bigger trend in the investment industry:  ETFs, which have become so popular in part because of their stark contrasts (in investment philosophy, expenses, transparency, and liquidity) to traditional actively-managed mutual funds, continue to evolve, making it more and more difficult to distinguish these supposed rivals.

According to the sponsor, the goal of DENT is “long term growth of capital” by “identifying, through proprietary economic and demographic analysis, the overall trend of the U.S. and global economies and how consumer spending patterns may change based on this analysis.” Dent made his mark on the investment community by using demographic trends to accurately predict the economic boom of the 1990s in this book The Great Boom Ahead. Since then, however, Dent has had a few whiffs, most notably predicting in 2000 (and again in 2004) the the Dow would soon reach 40,000.

DENT is an actively-managed ETF, relying on the non-traditional top-down approach of its manager to identify changing demographic trends and correctly interpret the future impact on various asset classes. Unfortunately, points out Larry Swedroe, we’ve seen this strategy before. In 1999, the AIM Dent Demographics Trend Fund set out with a similar game plan. “From 2000 through 2004, the fund lost more than 11 percent per year and underperformed the S&P 500 Index by almost 9 percent per year,” writes Swedroe. “In 2005, its sponsor put investors out of their misery by merging it into the AIM Weingarten Fund.”

Unlike many ETFs that charge basis points as low as 9 basis points, the expenses for DENT are quite hefty. Total fees are 1..56%, but the fund is capping investor costs at 1.5%. But as Matt Hougan at Index Universe notes, maybe DENT isn’t aiming to compete with other ETFs, but rather with actively-managed mutual funds and financial advisers.

So in more ways than one, DENT looks more like a traditional mutual fund than an ETF. It employs active management strategies in an attempt to generate excess returns, and makes no apologies for doing so. In order to fund these efforts, DENT charges an expense ratio in line with other active managers, and more than 15 times those of passively-indexed ETFs.

This isn’t an entirely bad development. It’s very possible that DENT will justify its expense ratio by consistently outperforming the market, making investors very happy  in the process. But it does detract from predictions and speculations about ETFs putting the mutual fund industry out of business. Active investing will always have its proponents, as will indexing and tactical asset allocation. ETFs and mutual funds are both here to stay. And in some cases, it is becoming increasingly difficult to distinguish the two.

Disclosure: No positions at time of writing.