Investor sentiment played a big role in WisdomTree's results this quarter. Image source: Getty Images.

When a huge part of your business depends on investors willing to put their money in European and Japanese companies, "Brexit" and "Bank of Japan, negative interest rates" aren't words you want to hear. Unfortunately for WisdomTree Investments, Inc. (NASDAQ:WETF), this double whammy of bad news hit the company in the second quarter. The ETF sponsor and asset manager reported financial results on July 29, and it wasn't pretty. Adjusted net income was $9.6 million, down 60% from last year's second quarter, and 21% below the $12.1 million profit in the first quarter of 2016.

The biggest culprit? Net outflows from the company's U.S. listed ETFs. How bad was it, and what is the company planning to do to right the ship? Here's a closer look.

These two funds drove most of the outflows

WisdomTree's two largest funds are WisdomTree Japan Hedged Equity Fund (NYSEMKT:DXJ) and WisdomTree Europe Hedged Equity Fund (NYSEMKT:HEDJ). As their names describe, these funds invest in Japanese and European equities -- specifically, well-capitalized dividend stocks -- but also include a currency hedge to mitigate fluctuation of the yen and euro against the U.S. dollar. And despite WisdomTree's diverse range of ETF offerings, these two funds were a whopping 43% of total AUM as recently as the end of July. 

In other words, WisdomTree has a lot of its eggs in these two ETF baskets, and that has really hurt over the past couple of quarters. After all, these two ETFs made up well over half of assets under management at the end of 2016. 

At the end of Q2, WisdomTree reported U.S. listed assets under management (AUM) of $39 billion. This was down 38% from $61.3 billion one year ago, and down 14% from the first quarter. Its European AUM, however, was up 55% from last year in the quarter -- to $952 million -- and up 7.6% since the first quarter. 

This $6 billion decline in AUM weighed heavily on both the top and bottom lines, with revenue falling 31% and adjusted net income falling 60% from last year. 

What management is doing about it

To start, it's important to understand that the macroeconomic events -- the U.K. "Brexit" vote and ultra-low interest rates in Japan as the country works to kick-start its economy -- are the kind of cyclical events that have always driven markets. At some point, investor sentiment will swing back around in favor of those equity markets, and investors will return to these two ETFs. After all, the very reason we're talking about them now, and why they've had an outsized impact on WisdomTree's earnings, is because they have been so popular. 

But at the same time, management is taking steps to expand its business and reduce its reliance on these two funds, including expanding its fund offerings and growing its international footprint. 

  • Recently entered the Canadian ETF market and already has over $90 million in AUM as of July 28. 
  • Bought out minority interest in its European business and continues to see growth there, as described above. 
  • Launching new ETFs on London, Italian, and German stock exchanges in the quarter. 
  • Announced S&P China 500 global product partnership with ICBC Credit Suisse in July.

Looking ahead

In some ways, WisdomTree's stock is getting punished by the success of two of its products, which have grown to represent a huge portion of its business. But that's the current reality of the company's business and its offerings. Eventually, investors will return to these two popular products. But at the same time, the company will continue expanding into new markets and developing new ETFs in order to find its next super-successful fund.

Over time -- hopefully -- this will help the company return to growth while also reducing its reliance on these two popular funds. It may take some time for management's efforts to pay off, but with global demand for ETFs only expected to continue growing, it could also be the kind of payoff that's worth waiting for. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.