The exchange traded fund industry has been shaken up by ETF providers switching indices and by a race to the bottom on fees in a cost war.
However, WisdomTree (NasdaqGM: WETF) says it sees these important developments as an opportunity rather than a challenge.
“WisdomTree specifically was designed to address these exact market dynamics,” said CEO Jonathan Steinberg during the firm’s recent third-quarter earnings conference call. [WisdomTree Quarterly Profit More than Triples]
Specifically, indexing giant Vanguard has announced plans to transition to new benchmarks at its ETFs. Vanguard says the move will allow it to cut fees, while BlackRock (NYSE: BLK) and Charles Schwab (NYSE: SCHW) have also unveiled cost reductions at their ETF lineups.
Steinberg says WisdomTree isn’t feeling any pressure to lower fees and that the company can coexist with low-cost ETF providers such as Vanguard.
The reason is that WisdomTree’s ETFs are not designed to follow traditional indices that weight stocks by market capitalization. Instead, many of the firm’s ETFs track benchmarks designed by WisdomTree that weight stocks by fundamental factors such as dividends and earnings. [More ETF Firms Joining Self-Indexing Trend]
In early October, Goldman Sachs added WisdomTree shares to its conviction buy list.
“WETF has underperformed amid rising concerns about ETF price competition, but we view the company as insulated, differentiated, and positioned to gain share in an attractive niche,” Goldman analysts said, according to a Benzinga report. “We see the risk/reward as attractive given an anticipated AuM growth of +30% over the next three years, with sustainable fee rates yielding margin expansion and 60% earnings growth. Downside is buffered by a potential takeout given the firm’s scarcity value as an ETF innovator with exemptive relief.”
WisdomTree’s Steinberg says Vanguard’s benchmark switch means indices are being scrutinized. [Video: WisdomTree on Dividend ETFs]
“We think it’s very positive for WisdomTree that people are looking under the hood at the underlying indexes, at the exposures that they are getting,” the CEO said during the earnings call. “Also a positive, the attention that aggressive pricing is getting from the media, from analysts, from the financial advisors, will help expand the ETF pie dramatically.”
The ETF fee war is putting pressure on firms that manage plain-vanilla index funds, he added.
“But I think the bigger story is, what does it mean for the traditional asset managers whose products get less and less competitive every day? I think it’s all very, very positive, at net-net of it all, and we are well-positioned for this trend,” Steinberg predicted.
Saibus Research analysts note that WisdomTree focuses on active ETFs and fundamentally weighted indices rather than standard benchmarks like the S&P 500.
“We like the product positioning of the company since it offers a more dynamic alternative to traditional ETFs and at a lower cost than typical active mutual funds,” they said in a note.