WisdomTree's Mo Slows

Why the pure-play in ETF stocks suddenly fell behind its small-cap and asset-management peers in September.


Sometimes the truth hurts. WisdomTree Investments, the only pure-play provider of exchange-traded funds, has lost more than 30% of its stock-market value since late August, while small-caps have dropped just 4%. Earlier this past summer shares of WisdomTree (ticker: WETF) were easily beating both small-caps and other asset managers.

Why the big swings in the relative performance of the ETF sponsor's stock? A major contributor may be the firm's otherwise laudable transparency. WisdomTree's Website updates the company's asset levels daily and self-reports net inflows weekly. As a result, attentive investors have a pretty good idea how the ETF specialist is doing at any time.

When it reports third-quarter financials this month, for instance, WisdomTree's inflows are expected to wind up around $185 million. That would be its second-worst quarter of flows since the market bottomed in 2009, observes Sterne Agee analyst Jason Weyeneth. It also would represent WisdomTree's first quarter with less than $1 billion in inflows over the past five quarters. "For this company, the third quarter is looking like a disappointment, considering the momentum it has built up to this point," says Weyeneth.

The firm, chaired by hedge-fund legend Michael Steinhardt, has mostly enjoyed an excellent early history. It's created a niche using alternative ETFs that compete against BlackRock's (BLK) iShares and State Street Global Advisors' (STT) SPDRs. However, WisdomTree, which recently moved to Nasdaq from the pink sheets, organizes its ETFs by fundamentals like dividends and profits rather than by market cap as the others do. It's also become an active manager of ETFs.


Recent flows have been negatively affected by one large client that pulled around $700 million from a few funds that were focused on emerging markets and currencies in the last week of the quarter, Weyeneth notes.

Despite the stumbles, the fundamental long-term growth story for WisdomTree remains bright as it participates in a fast-growing area. The shares have risen almost 50% this year, blowing past the typical money manager's 20% loss in 2011. Still, the slower inflows mean that the company didn't reach its own target of reaping 3% to 5% of total industry inflows in the most recent quarter. But WisdomTree's prior flows have allowed it to stay on plan for the year. Heading into the fourth quarter, the company's funds in 2011 have attracted about 4% of net new money heading into ETFs.

WISDOMTREE WASN'T THE ONLY ETF PROVIDER to lose ground in September, as European sovereign-debt woes and weaker global economic growth were reflected in lower asset prices for nearly everything.

With the blue chip SPDR S&P 500 ETF (SPY) falling 7% in the final month of the third quarter, assets of ETFs and exchange-traded notes slid 9% to $973 billion from August, says the National Stock Exchange.

ETF asset totals were still about 8% ahead of where they were at the same time last year. That, however, was quite a bit slower growth than the 28% seen from September 2009 to September 2010.