Peter Power/The Globe and Mail
Harry Dent, a U.S. economist and author known in some circles as the "sage of doom and gloom," is backing this week's launch of Dent Tactical ETF - a rare breed among exchange-traded funds.
Dent Tactical is an actively managed ETF in that it doesn't track an index. It invests in sector, industry or country ETFs where Mr. Dent sees opportunities based on demographic and other trends.
While this fund is among a handful of non-index ETFs in North America, it's part of a growing niche that is expected to rival traditional mutual funds, observers say.
"It's the wave of the future," enthused Dan Ahrens, chief investment officer at AdvisorShares Investments LLC, whose first product offering is Dent Tactical ETF.
The lower fees on these funds, compared with traditional mutual funds, and the fact they are easily accessible through full-service and discount brokers will make them more appealing to investors, he suggested.
ETFs are similar to mutual funds but trade like stocks and historically have tracked indexes.
Dent Tactical ETF has a management expense ratio (MER) of 1.56 per cent. While Mr. Dent, author of The Great Depression Ahead, expects a major market crash and depression to unfold between 2009 and 2012, he still sees investment opportunities, Mr. Ahrens said.
AdvisorShares has more non-index ETFs in the pipeline. It has filed prospectuses to launch the WCM/BNY Mellon Focused Growth ADR ETF and Legacy Long/Short ETF.
Invesco Ltd.'s PowerShares Capital Management unit launched five active ETFs last year. In May, Grail Advisors LLC launched Grail American Beacon Large Cap Value ETF, which invests in three mutual funds.
In the United States, Vanguard, a giant in index mutual funds and ETFs, and Pacific Investment Management Co., better known as Pimco, have also filed with regulators to enter the space.
In Canada, AlphaPro Management Inc. has three offerings and expects to launch 10 to 12 over the next year, president Howard Atkinson said. "We certainly see an opportunity to build an actively managed ETF family."
Horizons AlphaPro Managed S&P/TSX 60 invests in stocks chosen by technical analyst Ron Meisels. It's early days, but this ETF has gained 18 per cent for the six months ended Aug. 31 compared with 33 per cent for the S&P/TSX 60 Index.
Horizons AlphaPro Gartman Fund is a close-end fund that is expected to convert to an ETF next month. Horizons AlphaPro Fiera Tactical Bond Fund will convert to an ETF in 2010. "We see actively managed ETFs as the next growth area within the ETF industry," Mr. Atkinson said.
"Our plan is to build a diversified ETF family, with active management strategies, that encompasses equities, fixed-income, hedge-fund and quantitative strategies."
Scott Burns, director of ETF analysis with Chicago-based Morningstar, echoed that actively managed ETFs is "an area of growth," but it will take time to build track records to attract investors.
"The funds have to exist for three years to get their star ratings just like any actively managed mutual fund," Mr. Burns said. With the Dent Tactical ETF, it's possible that "having a celebrity name attached will draw people," he added.
Mr. Burns sees more active asset managers getting into the niche. Blackrock Inc. recently bought Barclays Global Investors, which runs the iShares family of index-mimicking ETFs. There is speculation that Blackrock could eventually spawn a host of active ETFs.
Mr. Atkinson said Canadian mutual fund firms could enter into his space, but suggested it won't be easy because their profitability would decline with lower-fee products.
"Would shareholders of those companies want them to do that?" he asked. "That's a bit of a conundrum."