WisdomTree Investments, the publicly traded New York-based ETF company whose yen-hedged equity fund “DXJ” has taken the ETF world by storm in the past six months, today posted a sevenfold jump in first-quarter net income largely because of DXJ’s industry-leading inflows in the quarter.
The company, the only pure-play publicly traded ETF sponsor, earned $7.9 million, or 6 cents per diluted share, in the quarter compared with $1.1 million, or 1 cent per share, in the same year-earlier quarter. Revenue jumped 53 percent to $29.3 million from $19.2 million in 2012’s first quarter, WisdomTree said today in a press release.
"WisdomTree's net inflows of $5.9 billion represented our best quarter yet and fueled a meaningful acceleration in our organic growth in 2013," the company’s Chief Executive Officer Jonathan Steinberg said in the release.
“The drivers behind this strong top-line growth underscore two important points: First … our currency hedged Japanese equity strategy led the entire ETF industry with $3.9 billion of net inflows in the first quarter; second, we are seeing balanced growth across our platform in important asset classes,” Steinberg said.
WisdomTree mostly offers “enhanced beta” index ETFs that cherry-pick securities based on fundamental factors such as dividend payments and earnings—a growing piece of the exchange-traded fund industry as the “pure beta” portion of the industry appears to be largely carved up already by players such as Vanguard, BlackRock’s iShares and State Street Global Advisors.
The WisdomTree Japan Hedged Equity Fund (DXJ) has become a perfect metaphor for the rise of both the fund sponsor and of the ETF industry per se. Investors, attracted by the low expense ratios, tradability and tax efficiencies of index ETFs, have been plowing record assets into exchange-traded funds in recent years. The success of DXJ shows how much investors are looking to ETFs to capture macro trends—in this case, Japan’s aim to weaken the yen to boost its exports, which in turn benefits companies and the economy.
The company’s stock, now listed on the Nasdaq under the symbol “WETF,” also tells the tale of a company—and an industry—in full ascendancy. Its shares, which were rising in the days ahead of the earnings, popped up another 2 percent in the wake of the earnings report, to $11.04. The stock is 81 percent higher year-to-date and up 38 percent in the past year.
“Excluding Japan-related assets, we achieved our second-best quarter with $1.9 billion in inflows across our dividend-weighted equity and fixed-income strategies," Steinberg said, isolating the plain fact that while DXJ clearly played an outsized role in WisdomTree’s strong first-quarter results. DXJ is hardly the only tale Steinberg’s firm has to tell.
Ever since the end of the first quarter on March 31, the firm’s total assets under management (AUM) have grown almost 9 percent. Again, first-quarter flows into DXJ totaled $3.9 million, and year-to-date, that figure jumped to more than $5 billion, according to IndexUniverse’s Fund Flows Tool . Since the end of the first quarter, DXJ has hauled in another $1 billion.
WisdomTree ended the quarter with $25.1 billion in AUM, and that figure is now up to $27.7 billion, according to data compiled by IndexUniverse. The company recently climbed one notch on the ETF industry League Table to the No. 5 U.S. sponsor by assets.
“We have laid the foundation to become a $100 billion asset manager,” Steinberg said in a conference call with analysts to discuss the earnings, stressing the next $75 billion in asset gathering is likely to be less difficult than the first $25 billion.
Another piece of the strong results were improved margins, which are better because of the higher AUM and because it ended its joint venture with BNY Mellon. Gross margins—total revenues less fund management and administration expenses and third-party sharing arrangements—jumped to 72 percent in the latest quarter compared with 63 percent in the year-earlier first quarter and 68 percent in the final quarter of 2012.
While expenses rose in the quarter by 19 percent, year-earlier results were hurt by costs associated with the now-ended patent dispute over fundamental indexing WisdomTree had with Rob Arnott’s firm Research Affiliates, and also by expenditures related to ETF shareholder proxies and to exchange listings.
The company, in its conference call, also stressed that while expenses may trend higher, they will almost surely drop as a percentage of revenue, a dynamic reflective of WisdomTree’s business model that plays into improving profit margins.
“We have a laser-focused commitment to ETFs, which will continue to take market share from other structures, “ Steinberg said in the conference call.
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