How to Profit From the ETF Craze
ETFs have hit Wall Street by storm. Over the past five to ten years investors have poured hundreds of billions of dollars in to ETFs, and the trend is expected to continue. ETFs allow investors to get easy access to entire indexes [e.g. the S&P 500 via the SPDR S&P 500 ETF (NYSEARCA:SPY)], commodities [e.g. gold via the SPDR Gold Trust (NYSEARCA:GLD)], currencies [e. g. the Euro via the Guggenheim CurrencyShares Euro ETF (NYSEARCA:FXE)], and more. They have made what were once esoteric investments such as emerging markets, mortgage bonds, and short positions commonplace.
I suspect that this trend is set to continue, and like the rise in e-commerce, mobile phone sales, and solar energy this is an industry that could prove to be a solid investment opportunity. But how do you make such a bet? The large ETF providers such as iShares and Powershares are owned by large financial conglomerates, and if you buy shares in, for instance, Blackrock (NYSE:BLK)—the company that owns iShares—you barely get any exposure to this uptrend.
Fortunately, if you look under the radar there is a compelling investment out there that gives the investment community exposure to this trend—WisdomTree Investments (NASDAQ:WETF). WisdomTree Investments manages the WisdomTree family of ETFs. These funds are unique in that they utilize both passive and active strategies. For instance you can buy a large cap U. S. equity ETF through them that ranks stocks by the amount of dividends they pay. It is passive in that it does not discriminate against any large cap stock, but it is active in that it picks stocks that a particular group of investors would gravitate toward.
Last year the company’s shares soared as one of its funds—the Japan Hedged Equity ETF (NYSEARCA:DXJ) grew immensely in popularity as it bet on Japanese stock and against the Japanese Yen, and this bet worked extremely well during the first part of last year.
This created triple digit year over year earnings growth for WisdomTree and the shares skyrocketed. But toward the beginning of the year reality set in as investors realized that while the strong revenues from the DXJ were nice, the growth that this fund generated probably wasn’t repeatable. Thus the shares fell nearly 50 percent.
But now the stock trades at a far more compelling valuation, with a price to earnings multiple in the low 20s. Now for many stocks this would be high, but considering that WisdomTree has exposure to the powerful uptrend in ETF usage among investors it can grow its earnings rapidly enough in order to justify this valuation.
Not only is the company growing its assets under management, or the size of its ETFs, but more recently it has begun to grow overseas in Europe and in Latin America. ETFs aren’t nearly as popular with investors in these regions, and the company hopes to make significant inroads in these markets with its unique product lines.
Investors in WisdomTree will be pleased to learn that the company has strong sales and revenue growth—even if we exclude last year’s DXJ aberration—and that it has no debt and over $100 million in cash and equivalents. The company is extremely efficient with high margins, and it has only 90 employees.
Given these points, I think WisdomTree is a stock you can buy on weakness for the long term. It will be volatile, and its quarter to quarter earnings may track the stock market considering that its earnings are based on the amount of assets it manages (which rises and falls with global stocks), but the company has a strong business model, a compelling product, and it operates in an excellent industry which, as we have seen, has changed the investment landscape for both retail and institutional investors alike.
Disclosure: Ben Kramer-Miller has no position in WisdomTree Investments or in any of the funds or stocks mentioned in this article.