Image: WisdomTree
Exchange-traded fund provider WisdomTree Investments (WETF 0.07%) has found itself in the right place at the right time, as investors have rushed into ETFs in their efforts to capitalize on the six-year-old bull market. Even though larger ETF providers dominate the space in terms of assets under management, WisdomTree's strategy of catering to particular niche needs has fit well with the markets' overall performance recently, and coming into Friday morning's first-quarter financial report, WisdomTree investors expected to reap the rewards of greater interest in the company's funds. WisdomTree attracted record inflows during the quarter, and investors are increasingly confident that the company will be able to convert that interest into growth in profits. Let's look more closely at WisdomTree's latest numbers and whether the ETF provider can become more profitable in the near future.
WisdomTree is drawing more attention than ever
WisdomTree's first-quarter results showed just how good a job the company has done at making its funds popular. Revenue soared 40% to $60.1 million, more than meeting the ambitious targets that most of those following the stock had set for the company. Yet those higher sales didn't translate into better headline profitability, with WisdomTree seeing net income drop 60% from year-ago levels. Even after adjusting for a one-time gain in the year-ago quarter, earnings of $0.09 per share were a penny below expectations and also down slightly from last year's adjusted quarterly earnings per share.
The reasons for WisdomTree's revenue improvement were obvious. Assets under management soared to $55.8 billion, a new record for the company, as WisdomTree attracted $13.5 billion in net inflows during the first quarter alone. Advisory fees have also inched upward over the past year, but the most impressive thing about WisdomTree's recent performance is that the company captured market share of almost a quarter of industry inflows during the period.
Once again, though, understanding WisdomTree's earnings figures requires some closer examination. Last year's change in how WisdomTree reports income-tax expenses led to figures that don't compare as easily as they did before, with the company claiming a $13.7 million tax benefit in last year's quarter but posting nearly $9 million in income-tax expenses in the latest quarter. On a pre-tax basis, WisdomTree saw income climb 28%, better reflecting the success the company has had. Admittedly, though, expenses have risen at the same rapid pace as revenue, with compensation expense doubling from year-ago levels in part due to incentive pay related to the ETF provider's success.
Image: WisdomTree
CEO Jonathan Steinberg highlighted the record results, pointing to WisdomTree's ability to offer innovative products to capture market trends. "WisdomTree's industry-leading growth underscores our ability to identify and disseminate useful and differentiated investment solutions to an ever-growing ETF market," Steinberg said, and he pointed to the success of WisdomTree's currency-hedged equity ETFs as a key component of that success, especially as the flagship WisdomTree Europe Hedged Equity Fund became the second of the company's ETFs to pass the $10 billion mark.
Can WisdomTree keep up the pace?
Certainly, WisdomTree is working to capitalize on its niche as much as it can while the iron is hot. The company has launched new currency-hedged funds targeting foreign small-cap stocks and dividend-paying stocks, satisfying investor appetite for international investments that will climb in value even when foreign currencies lose ground against the greenback. At the same time, the company has listed several new ETFs on exchanges throughout Europe.
The concern, though, is that if the dollar's strength reverses itself, currency-hedged ETFs will underperform their larger local-currency-based counterparts. If that happens, it's unclear how long investors will stick with the strategy, especially given WisdomTree's higher expense ratios compared to competing products that don't use currency hedging strategies.
For now, though, WisdomTree is continuing to perform well, and macroeconomic trends throughout the world suggest that dollar strength could last a while longer into the future despite a recent short-term break in its uptrend. With its success having put it among the top companies in the ETF space, WisdomTree has the flexibility now to consider more strategic moves that can help it diversify beyond its successful currency-hedged niche.
