The traditional mutual funds offered to investors by many financial services companies are “black and white televisions instead of i-pods”, according to Jonathan Steinberg, the chief executive of WisdomTree, the exchange traded fund provider which reported strong third quarter results last week.
“Nobody buys a black & white tv today,” said Mr Steinberg, who added that it was in investors’ self interest to adopt ETFs because of their cost and qualitative advantages over traditional funds.
“I am not saying that mutual funds will disappear but the industry will find it increasingly hard to ‘move the needle’ by using traditional fund structures in the face of competition from ETFs.”
Mr Steinberg said he was “surprised” that so few financial services companies had joined the ETF industry, and he described growth in the market as “disappointing” over the past 20 years.
However, he also acknowledged their failure to do so had created opportunities for new entrants like WisdomTree and he predicted faster growth for the ETF industry in future years.
WisdomTree has attempted to distinguish itself by building ETFs based on fundamental value indicators, such cash dividends or core earnings, instead basing its funds on market capitalisation weighted indices.
Mr Steinberg said he believed WisdomTree had reached “ a key inflection point for sales growth” after the company announced record revenues and assets under management in its third quarter results.
Boosted by new ETF inflows of $1.16bn in the third quarter, total assets under management reached $9bn by September 30, up 64 per cent on the same period a year ago.
Strong inflows have continued into the fourth quarter with WisdomTree already gathering a further $380m in new cash.
Mr Steinberg said the company’s margin potential was becoming apparent to investors as the business was “eminently scaleable” with third quarter revenues up 76 per cent on the same period last year while expenses had risen only 18 per cent.
The company reported record revenues of $10.1m and a second consecutive quarter of positive operating profits.
WisdomTree expects to break into full profitability (positive net income on a GAAP basis) once assets reach between $9.2bn and $9.4bn.
The company, which is debt free, intends to list on an exchange next year.
Noting that WisdomTree has become the eighth largest US ETF provider, Mr Steinberg said the company’s growing scale and range of products had made it a more attractive proposition for a larger universe of institutional investors and advisers.
In September, Advisors Asset Management added WisdomTree ETFs to its product platform and agreed to serve as an external marketing agent in the independent broker-dealer channel.
The company is also continuing to build its presence in Latin America with an agreement with Compass Group of Mexico to distribute WisdomTree ETFs throughout the region.
WisdomTree’s recently-launched Emerging Markets Debt Fund, an actively managed ETF that invests in local currency debt, has met with an enthusiastic response, gathering almost $375m from investors since its inception in August.
The company is also planning to launch a range of actively managed bond funds covering Asia, Latin America, Brazil and EMEA.
Mr Steinberg said new products would remain an “important priority” for WisdomTree at a time of “significant innovation” across the ETF industry.
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