Will DENT Dent ETFs’ Low-Cost Image?

By Heather Bell

The Dent Tactical ETF, the first offering from AdvisorShares, is now out. And honestly, I just don’t know how to size it up.

Skepticism definitely plays into the mix when considering this new exchange-traded fund (NYSE: DENT).

Ron Rowland has written a recent Seeking Alpha column in which he projects that the ETF will make his April 2010 ETF Deathwatch list. He makes some very interesting and valid points. (You can also see related IU.com stories on DENT's costs and a recent Q&A with Dent about his investment strategies here and here.)

My concern I share with Rowland is with the fund's expense ratio – 1.56 percent before the waiver, and 1.5 percent after.

That’s A LOT of basis points, and it seems to undermine the very foundation of what an ETF is supposed to be all about. According to the Investment Company Institute, the average expense for equity mutual funds in 2008 was 0.99 percent.

That study however, excluded funds of funds, which would be more comparable with DENT.

But there are a bunch of ETFs of ETFs out there following index strategies, and they don’t come close to the costs of DENT.

PowerShares charges 79 basis points, with no waiver, for its funds of funds based on indexes from New Frontier Advisors. Meanwhile, the ones offered by iShares all charge 35 basis points or less, after a 14-basis-point waiver.

Granted, these are still index-based funds, and they are primarily invested in other “in-house” ETFs, but it’s hard not to flinch when you compare those prices with DENT’s.

A key appeal of ETFs has always been that they are cheaper than actively managed mutual funds and many – if not most – index mutual funds.

But until recently, almost all of the funds have managed to keep their expense ratios below 1 percent, which I consider a pretty important barrier. Off the top of my head, the MacroShares are the only ones I can think of that have definitively burst through the 1 percent ceiling, and they are not structured like traditional ETFs.

Basically, DENT isn’t even in the same ballpark as your average ETF in terms of expenses. And I can’t help but wonder if it’s setting a bad precedent—opening the floodgates, as it were—especially with regards to actively managed funds.

To date, actively managed ETFs from PowerShares and Grail Advisors have kept costs at 80 basis points or below. But the AdvisorShares fund nearly doubles that.

So the launch of DENT raises a bunch of questions.

The key one for the fund itself is: Will investors be interested?

But also: Will it outperform? Will it have sufficient liquidity?

And most importantly for ETFs: Will it set the trend for future fees?

Original post

Comments

[Gardener:]

I don't think the floodgates will open and pour out more absurdly expensive funds like DENT. The fact of the matter is that the hurdle rate is just too high for investors to tolerate and recognize a reward that is reasonable to the risk of this product. That expense ratio is just a ball and chain for Dent, but I do wish investors good fortune.

Sep 21 05:05 PM

[Heythere:]

In your Fund of Funds comments, you forget to include QAI and MCRO by IndexIQ Advisors. Both of these ETFs state a total expense ratio of 75 bps. The issue with this quoted expense ratio is that it does not include the expenses the fund will pay to its ETF holdings. Including this, the company expects a total expense ratio of 100 to 110 bps. Still nowhere near the DENT fee, but I feel that the future expenses for more "unique" themes/strategies will lie somewhere between the two.

Sep 22 08:53 AM

[Ricard:]

DENT is exactly what will happen to your portfolio if you 'invest' in this claptrap fund. I've never known dents to be good for the resale value on anything...

In fact, I may look at shorting this 'fund' soon...this sounds like a sure bet to oblivion.

Sep 22 07:55 PM