For ETF provider WisdomTree Investments (NASDAQ:WETF), the bull market over the past five years has been a mixed blessing. Although the company has done a good job of getting more investors into its exchange-traded funds, WisdomTree has faced a challenge in growing its profits as a consequence. In its third-quarter results, WisdomTree made it clear that its struggle toward greater profitability continues, but it nevertheless showed signs of strength that suggest better times could be ahead. Let's take a closer look at how WisdomTree Investments did last quarter.
Attracting investors to WisdomTree ETFs
At the most basic level, WisdomTree's most prominent measures of performance were mixed to positive. Revenue soared almost 19% from the year-ago quarter, as WisdomTree boosted its average assets under management as well as the amount of fees it was able to capture from its funds as compensation for its advisory services.
On the net income front, WisdomTree's results look a lot less favorable on the surface, as net income dropped by 29% from year-ago levels. But the key thing to note there is that until this year, WisdomTree had net operating losses that effectively wiped out any tax liability it had from its profits. In 2014, WisdomTree has had to start paying taxes on its earnings, and when you take out the $9.6 million in income tax expense during the third quarter alone, pre-tax profits soared by 35% compared to 2013's third quarter.
Looking more closely at the results, WisdomTree scored successes in several different areas. ETF assets under management for U.S. funds jumped 14% to $35.8 billion at the end of the quarter, with inflows making up the bulk of that growth. Part of the reason why WisdomTree has attracted investment assets is that more than half of its funds have outperformed their benchmark averages since their creation, and investors have disproportionately chosen those funds over WisdomTree's laggards, putting 86% of the ETF provider's assets under management into funds that are beating the average. And according to a call transcript provided by S&P Capital IQ, 68% of their ETFs beat their peer group -- an excellent statistic.
WisdomTree has also been smart about its financial management. On the revenue side, average advisory fees rose slightly to 0.52%, showing that the company is making more even as its asset base grows. WisdomTree also kept expenses relatively in check, rising just 9% as the company benefited from transferring much of its administrative and custodial functions to State Street (NYSE:STT) and the associated cost savings.
Why WisdomTree's future looks bright
One concern that investors have about WisdomTree is that its success to date has depended largely on the performance of foreign markets. WisdomTree notes that most of its assets under management are exposed to foreign-market conditions, especially emerging markets, and it needs further growth in those areas to keep investors satisfied with their returns. In particular, about 30% of WisdomTree's assets under management come from a single ETF -- the WisdomTree Japan Hedged Equity Fund (NYSEMKT:DXJ), which has had average annual returns of more than 28% in the past two years as a combination of soaring Japanese stock markets and a plunging yen have resulted in the perfect environment for the ETF. With returns for that fund having moderated somewhat recently, WisdomTree will have to do its best to hold onto those investors rather than losing them to the next big-picture momentum play.
Along those lines, WisdomTree's initiative in September to become part of Charles Schwab's (NYSE:SCHW) OneSource platform is a smart move. Among the six ETFs it made available to Schwab investors, the two lowest-cost funds are oriented on dividend stocks in the U.S. market. Although it also included dividend-oriented ETFs that serve international markets as well as a global real estate ETF and a managed futures ETF, WisdomTree would prefer to see Schwab investors use a broad-based allocation strategy that puts money into all of its fund offerings.
Overall, WisdomTree's results show the continued health of the financial markets and investors' slow but steady return to retail investments like ETFs. The key to its long-term success, though, is to branch out beyond some of its most popular niches and make a broader foray into the financial market areas that attract the most investment. If it can successfully navigate the complex ETF competitive environment, then WisdomTree has plenty of opportunity to continue growing in the years to come.