In the $1.42 trillion exchange-traded fund industry, where three dominant firms represent more than $1.1 trillion in assets, WisdomTree Investments Inc., with $24.3 billion under management, might seem like an afterthought.
But don't tell that to company founder and chief executive Jonathan Steinberg.
“In the ETF space, it is not easy being second or third to market with a product, and being first to market is a substantial advantage,” he said. “But if you're not first, you have to be differentiated, and it also helps to be better.”
That is essentially the story of WisdomTree, a relative upstart that was launched in 2006 with 20 mostly fresh and innovative ETFs. The roster now in-cludes 47 ETFs, but it is not the number of products as much as the type of products and the way they are created that makes WisdomTree stand out.
Exhibit A is the WisdomTree Japan Hedged Equity ETF (DXJ). The $5.1 billion fund, which was among the company's original 20 ETFs, has taken in $3.5 billion since the start of the year. For perspective, that is $1.1 billion more than the inflows of the second-fastest-growing ETF this year, the $19.5 billion iShares Russell 2000 Index (IWM).
One would expect nothing less from the likes of Mr. Steinberg, the son of renowned corporate raider Saul Steinberg and husband of CNBC financial reporter Maria Bartiromo.
Early in his career, Mr. Steinberg had aspirations of becoming a journalist. In the late 1980s, he published a magazine, Individual Investor, but it closed in 2001 after the tech bubble burst.
“I wanted to compete with McGraw-Hill,” he recalls. “All I wanted to be was a great journalist.”
IN-HOUSE BENCHMARKS
The Japan Hedged Equity ETF, like all WisdomTree products, is pegged to a benchmark that was created in-house, which is where the creativity begins. Mr. Steinberg and company abhor traditional market-cap-weighted indexing. At WisdomTree, the indexes are weighted based on fundamental factors such as dividends and earnings, and the indexes are re-balanced annually.
“We don't think cap-weighted indexes are optimal, because they tilt the weight toward the most expensive stocks and they don't re-balance,” said Luciano Siracusano, the company's chief investment strategist.
The kicker for the Japan Hedged Equity fund is that it was tweaked in 2010 to include a currency hedge, which gave the strategy a huge boost in December when Japan's newly elected prime minister, Shinzo Abe, made clear his intention to deflate the yen.
“Right now, DXJ is a fund that is taking advantage of the yen's weakness,” said John Spence, web editor at Global Trends Investments. “The falling yen makes DXJ a story stock — and an easy sell — because it is long Japanese stocks and is effectively neutral the yen.”
As Mr. Steinberg pointed out, being first to market is crucial in the ETF space, but being innovative also can provide a fighting chance.
For instance, the $6.8 billion iShares MSCI Japan Index ETF (EWJ) has been providing investors access to the Japanese stock market since 1996. But at least until the yen reverses course and starts gaining versus the U.S. dollar, the WisdomTree fund should continue to leave the iShares fund in the dust.
So far this year, the WisdomTree version has gained more than 11%, which is more than double the 4.7% gain of the iShares version.
Along with its track record of innovation, there are plenty of examples of WisdomTree being first to market.
The list includes three international small-cap ETFs that were introduced as part of the 2006 debut: WisdomTree International SmallCap Dividend (DLS), WisdomTree Europe SmallCap Dividend (DFE) and WisdomTree Japan SmallCap Dividend (DFJ).
In 2007, it introduced the first dividend-focused emerging-markets-equity ETF, WisdomTree Emerging Markets Equity Income (DEM), and the first emerging-markets small-cap ETF, WisdomTree Emerging Markets SmallCap Dividend (DGS).
In 2008, WisdomTree India Earnings (EPI) became the first India equity ETF, and the WisdomTree Chinese Yuan (CYB) became the first currency ETF structured under the Investment Advisers Act of 1940.
The WisdomTree Managed Futures Strategy (WDTI) was the industry's first managed-futures ETF when it was launched in 2011.
And early last year, the WisdomTree Emerging Market Corporate Bond (EMCB) became the first emerging-markets corporate-bond ETF.
“Rather than just doing plain-vanilla ETFs, they are doing a lot with what are really quasi-active, fundamentally based indexes,” Mr. Spence said. “They've shown that you can survive in the ETF space as a niche player.”
As the sixth-largest ETF provider in a field dominated by such giants as
BlackRock Inc., State Street Global Advisors and
The Vanguard Group Inc., it is hard to imagine WisdomTree ever dominating the ETF space. But as Mr. Steinberg emphasized, with the overall ETF industry rapidly growing, gaining market share is less of a concern.
“The ETF industry is growing quickly at the expense of other structures like mutual funds,” he said.
A commitment to sticking with ETFs is part of WisdomTree's niche and something that has not been lost on investors in the publicly traded company.
"SECULAR GROWTH'
“It is one of my favorite, if not my favorite, company among asset managers and online brokers,” said Jason Weyeneth, who covers WisdomTree as a sell-side analyst with Sterne Agee Group Inc. “There is a tremendous secular-growth story in the ETF space, and WisdomTree is well-positioned for it.”
Even though the company didn't become profitable until 2011, it has been on a steep trajectory.
In 2011, the company earned 2 cents per share on $65.2 million in revenue. That compares with earnings of 8 cents per share last year on $84.8 million in revenue.
Mr. Weyeneth expects revenue to hit $133 million this year, with per-share earnings expected to reach 32 cents. For 2014, he is projecting revenue of $182 million and earnings of 55 cents per share.
WisdomTree's stock is up about 70% from the start of the year, which compares with a 10% gain by the S&P 500 and a 17% gain by the asset management category as tracked by Morningstar Inc.
jbenjamin: @investmentnews.com Twitter: @jeff_benjamin
