Avoid AdvisorShares Dent Tactical ETF Due To High Fees, Underperformance

Jan.24.12 | About: AdvisorShares Dent (DENT)

Some investment products defy explanation and are not recommendable.

The AdvisorShares Dent Tactical ETF (NASDAQ:DENT) is an actively managed exchange-traded fund (ETF) that racked up a 456% annual turnover and charges a 1.65% expense rate. Extraordinary evidence would be needed to choose such a fund since there are thousands of mutual funds to choose from with lower turnovers and fees.

How can a fund be "special" enough to justify high fees and turnovers that rack up trading costs and taxes? There are three ways:

(1) The fund demonstrates potentially persistent outperformance versus its benchmark (alpha).

(2) The fund is trading at a severe discount to the net asset value (NAV) of its portfolio.

(3) The fund provides access to an exotic and profitable investment strategy that is unavailable to retail investors through lower-fee investment vehicles.

(1) Persistent Performance: Show Me the Money

Unfortunately, DENT has underperformed in 2010 and 2011 when compared to its MSCI World benchmark. In 2010, its benchmark rose 7.72% while total return to DENT shares was 3.92%. Subsequently, in 2011 DENT shares suffered a 8.65% loss while its benchmark suffered a 4.38% loss. Like many actively-managed funds, DENT has underperformed its passive benchmarks. Thus, there is no reason to buy DENT on the basis of outperformance.

(2) Bargain Hunting: NAV Discount

Like most ETFs DENT trades near the value of its portfolio, and typically has low premiums or low discounts to NAV. Even if investors are lucky enough to catch a small discount to NAV, such a small variation cannot justify the fund's high fees which are charged every year.

(3) Product Novelty: Exotic or Easily Replicated?

Being largely collection of cash and other ETFs, the DENT portfolio is very easily replicated. Here are its top holdings:

Holding

Ticker

Portfolio Weight*

Expenses

iShares Barclays TIPS Bond

TIP

14.9%

0.20%

PowerShares DB US Dollar Index Bullish

UUP

13.8%

0.75%

iShares S&P SmallCap 600 Value Index

IJS

7.1%

0.25%

iShares Dow Jones US Pharmaceuticals

IHE

6.8%

0.47%

iShares Dow Jones Select Dividend Index

DVY

6.7%

0.40%

iShares Dow Jones US Utilities

IDU

6.4%

0.47%

Click to enlarge

*These holdings do not add to 100% since much of the DENT fund is held in cash.

All of these ETFs are available to retail investors, and in fact are more liquid than DENT. Investors who seek to follow DENT's investment strategy could easily look up its portfolio holdings (I used Morningstar for this data) and then invest the same proportions of their own portfolio. Though I do not recommend these allocations, this would be a cheaper (lower-fee) way to follow DENT.

Conclusion

As a financial product DENT needs to develop more of a value proposition for potential customers. As it stands, it charges high fees and provides products that investors have easy access to without a compelling track-record. DENT's management should retool this fund by charging lower fees, reducing fund turnover, and buying assets that retail investors cannot easily obtain. Only then could it be a recommendable ETF.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.