New York-based ETF sponsor WisdomTree Investments (Nasdaq:WETF) announced its third quarter results and they were exceptional. Normally I don't write about small-cap investments, but when the only pure-play ETF sponsor available delivers news that outright refutes the perception you can't survive without rock-bottom fees offered by BlackRock (NYSE:BLK), State Street (NYSE:STT) and Vanguard, I just couldn't resist. WisdomTree could be the next big asset manager. Here's why.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

Dying on the Vine
According to Ron Rowland of the Street.com, the lifetime mortality rate for ETF funds is 17.3% with 300 out of 1,733 funds launched in the United States meeting their demise. Another 300 or so are on ETF Deathwatch, meaning one-third of the product launches to date have been unable to profitably sustain themselves. Most of the blame for the current situation comes down to a price war currently being waged by the big three. I believe, however, WisdomTree CEO Jonathan Steinberg has a better explanation for why his firm is thriving while many others including Russell and FocusShares falter.

In its Q3 press release, Steinberg said the following: "At a time when many ETF sponsors are competing directly against each other in market capitalization-weighted, beta exposures, WisdomTree's commitment to innovative, differentiated products has strengthened our competitive position in the industry." How right he is. The investment media, myself included, spend so much time focusing on MERs that we tend to forget that portfolio construction is still a critically-important piece of the asset management puzzle. WisdomTree's average ETF advisory fee for the first nine months of 2012 is 0.54%, significantly higher than many of its peers; yet it's attracted ETF net inflows of $3.67 billion year-to-date, 16.9% higher than in the first nine months of 2011. Higher fees, as it turns out, don't necessarily equate to bad business.

SEE: Easy-To-Understand ETFs

Third Quarter Results
Excluding litigation, shareholder proxy and initial exchange listing fees, WisdomTree's proforma operating income in the third quarter was $4.8 million, 200% higher year-over-year and 55% higher quarter-over-quarter. Total revenues in Q3 2012 were $21.7 million, up 22.6% from Q3 2011. I mentioned above that its net inflows YTD were 16.9% higher than a year earlier. In the fourth quarter of 2011, quarterly net inflows were $756 million. Expecting a significantly higher figure in Q4 2012, I would guess that WisdomTree's net inflows for 2012 could be over $5 billion, 28% higher than in 2011. In the first nine months of 2012 its non-GAAP pre-tax operating margin was 16% compared to 6% in 2011. If I were a betting man, I'd wager the 2012 annual non-GAAP pre-tax operating margin will be at least 20%. On that basis it should generate revenues of $84.5 million in 2012, pre-tax non-GAAP operating profits of $16.9 million and diluted earnings per share of $0.08. Most importantly, Q3 saw total revenues increase for the eighth time in nine quarters demonstrating consistent growth in its business model.

SEE: Analyzing Operating Margins

The Future
WisdomTree isn't immune to fund closures. On October 19 it announced that it was closing three funds with assets under management of $25 million or 0.15% of its $16.8 billion total AUM at the end of the third quarter. Two of the funds are single currency ETFs (South African Rand and Japanese Yen) and the third is the WisdomTree LargeCap Growth Fund (ARCA:ROI), a U.S. equity fund with an underlying index that screens for earnings growth. The three funds are the second, fourth and sixth smallest of WisdomTree's 49 funds in terms of assets; it's more a pruning issue than anything.

WisdomTree's future appears in emerging markets where four of its six funds with assets of more than $1 billion are located. Its biggest fund by a wide margin is the WisdomTree Emerging Markets Equity Income Fund (ARCA:DEM) with assets of $4.4 billion as of October 29. The fund takes the highest yielding 30% of the Emerging Markets Dividend Index, which is composed of dividend-paying companies from 19 emerging markets including Taiwan, Brazil, China & Russia. Two-thirds of the 233 holdings are large-cap stocks with the remainder primarily mid caps with some small caps as well. With a distribution yield of 5.93%, I can see why it's getting so much attention. Based on a 0.63% expense ratio, this particular fund will generate 24% of WisdomTree's estimated 2013 revenue of $115 million. The 12 emerging market funds it currently manages have assets of $9 billion, 54% of its total assets under management. Its five index-based equity funds, in turn, account for more than two-thirds of the emerging market fund assets and charge an average fee of 0.67% annually. It's hard to imagine a scenario besides another market crash where WisdomTree's financial position won't get stronger each quarter as it takes market share. Year-to-date its equity market share is 4.8% putting it in fifth place, 170 basis points behind PowerShares. I look for it to grow that number in the next year.

The Bottom Line
If you try to evaluate WisdomTree like you would any other financial company you'll likely pass on investing in it. It's important to keep in mind, however, that it's grown assets under management 55% annually since the end of 2008. Whatever happens in the ETF price war in 2013 and beyond, WisdomTree's figured out how to rise above it. Its stock won't be under $10 for much longer.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  2. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  8. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!