Small-Cap Corner: Buying The ETF Issuer
The exchange-traded products industry has grown to include nearly 1,500 ETFs and ETNs with almost $1.2 trillion in assets under management (those are just the U.S. numbers), and investors have understandably focused on which ETFs generate profitable trading ideas.
Said another way, many investors overlook the fact that some of the ETF industry's biggest players are units of large, publicly-traded financial services firms. It is possible for investors to profit from the ETF industry's exponential growth without actually owning a single ETF. This objective can be accomplished by owning the stocks of ETF issuers.
There are several such stocks, but just one that can be considered a pure-play ETF sponsor: WisdomTree Investments (NASDAQ: WETF). WisdomTree's ascent up the financial services food chain has mirrored the growth of the ETF business at large. Later this month, the company will celebrate its first anniversary as a Nasdaq-listed stock. Prior to that, New York-based WisdomTree traded on the pink sheets.
With a market value of just over $827 million, WisdomTree is by definition a small-cap stock. In the ETF universe, however, WisdomTree is far from small. The company, which sponsors 48 ETFs, had $14.95 billion in assets under management at the end of June, according to data from the ETF Industry Association. That makes WisdomTree the seventh-largest U.S. ETF sponsor as ranked by AUM.
Year-over-year, WisdomTree's ETF assets have jumped 16 percent, an increase that compares quite favorably to the two percent and 12 percent increases posted by BlackRock's (NYSE: BLK) iShares and State Street's (NYSE: STT), State Street Global Advisors. iShares and SSgA are the two largest U.S. ETF sponsors.
The impact on shares of WisdomTree is palpable. Compare WisdomTree against four other publicy traded ETF sponsors – BlackRock, State Street, Invesco (NYSE: IVZ) and Charles Schwab (NYSE: SCHW) – and the results are impressive. Year-to-date, only Schwab has delivered better returns than WisdomTree.
Shares of WisdomTree are up almost 13 percent this year, and some analysts see more upside. The stock closed below $7 on Monday, but last week Goldman Sachs initiated coverage of WisdomTree with a Buy rating and a $9 price target.
In the note, Goldman Sachs stated, "We view WETF as a rarity in financials: A growth stock with ample runway for 30%+ revenue and EBIT growth amid 20% annual industry growth in ETF assets. We believe investors underappreciate and undervalue: (1) the firm's sector-leading organic growth profile, driven by differentiated “nontraditional” ETFs; (2) the scalability of WETF's model and powerful margin expansion potential; and (3) the scarcity value in owning the only public pure-play ETF manager ($15bn in AuM), with a valuable asset in exemptive relief for active ETFs."
The Goldman Sachs note also points out that WisdomTree could be a takeover target.
A bearish scenario for WisdomTree exists in the potential for the ETF industry to see its growth stall and lose assets to rival products. Another possible, though not likely, problem would be a dramatic change in the company's highly-respected management team. Former hedge fund manager Michael Steinhardt is the company's chairman and Jonathan Steinberg is the CEO.
Investors seem to like what the pair are doing for the company because the stock is up 5.6 percent since the days leading up to WisdomTree's move to the Nasdaq in July 2011. All of the other ETF sponsor stocks mentioned in this piece are in the red over the same time period.
Neither a dramatic stall in ETF asset growth or management changes at WisdomTree appear imminent, indicating that WisdomTree may indeed have more near-term upside to offer investors. Some of the firm's most popular ETFs inlcude the WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM), the WisdomTree India Earnings ETF (NYSE: EPI) and the WisdomTree Dividend ex-Financials Fund (NYSE: DTN).
Latest Ratings for WETF
|Dec 2014||Piper Jaffray||Downgrades||Overweight||Neutral|
|Dec 2014||Sidoti & Co.||Downgrades||Buy||Neutral|
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