Evaluating The DENT ETF

December 22, 2009

How does a fund perform worse than its holdings? Active management. Very, very active management.

 

The DENT portfolio is one of the few truly active ETFs out there. But can you actually figure out what’s going on?

ETF investors have—justifiably I believe—come to expect complete transparency as a kind of inalienable right. It’s the price ETF issuers pay (if you really consider it a payment) for having access to the incredible power of the ETF structure. You want intraday liquidity and the marketing potential of an ETF? You need to tell investors what’s going on.

When Harry Dent launched his ETF, he did an interview with us here at IndexUniverse.com wherein he laid out his broad premises:

  • Demographic trends favor emerging markets
  • India and Brazil will drive emerging markets more than
    China
  • Stocks (in September) were at the end of their rally, and 2010 is not looking good

He was also very quick to point out that the current level of volatility in the market meant that momentum investing—trading really—was the only sensible strategy in the short term.

How do you evaluate someone’s trading record? You look primarily at performance.

The DENT ETF is prohibited from marketing based on it, but the portfolio managers have run a variable annuity using a similar strategy since May 1, 2008. If you comb through DENT’s prospectus, you’ll see that that portfolio performed nicely last year: From inception on May 1, 2009 through May 31, 2009, the Dent Strategic Portfolio delivered a nifty 12.35 percent return, compared with a 1.77 percent rise in the S&P 500.

Not bad.

Unfortunately, since the ETF’s debut in mid-September, that performance has reversed: DENT is down 2.8 percent, while the S&P 500 has rallied 6.3 percent.

 

 

The good thing is that, because it’s an ETF, we should theoretically be able to look back at the portfolio holdings and see what DENT held and how it traded. That way, we could evaluate whether we agreed or disagreed with the managers’ choices along the way.

I say “theoretically” because it’s only possible if you’re really, really paying attention.

According to DENT’s sponsor, AdvisorShares, the ETF has made the deliberate choice to only publish its holdings daily. There will be no record of previous changes or trading history, such as you can get from any index-based ETF. Because it’s an active fund, there’s also no published quantitative methodology to evaluate. Your only way of keeping tabs on what happens is to hit “refresh” on the DENT Web site every morning and record the results.

 

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