Wisdom Tree Puts Forth New ETF Shoots, But Shows Some Earnings Blight

ETF provider WisdomTree (WSDT.PK) and Dreyfus Corporation announced the launch of four currency income ETFs yesterday based on the Chinese Yuan (CYB), Indian Rupee (ICN), Brazilian Real (BZF) and the Euro (EU), with a Japanese (JYF) one in the pipeline. Investing in these funds would be similar to investing in money market funds in these countries. As discussed in the recent Fortune article titled Is Your Money Fund Safe?, most money market funds maintain a constant share price like $1 and the firms running these funds go to great lengths to ensure that the share price does not drop.

Unlike money market funds, these WisdomTree funds may not maintain a constant value on account of the investment instruments they are using to simulate money market like returns. With Brazil's central bank raising its benchmark lending rate by 50 basis points in April, the Selic rate now stands at 11.75% and is probably very appealing to income investors despite the currency risk. Indian banks tend to offer higher interest rates to domestic accounts when compared to Non-Resident accounts. I wonder what the yield on the WisdomTree Dreyfus Indian Rupee Fund (ICN) is going to be as I could not find that information on the WisdomTree website or on ETFConnect.com.

As an investor in WisdomTree, the most interesting part of the press release was the fact that WisdomTree's assets under management [AUM] grew to $4.7 billion from $4.3 billion last month. While this jump is noteworthy, growth in AUM has obviously slowed when compared to the rapid accumulation of assets that occurred last year as discussed in this blog entry about WisdomTree. Given below is an updated table of AUM growth at WisdomTree.

Date	Assets Under Management
June 16, 2006	20 ETFs begin trading
October 13, 2006	$700 million
November 10, 2006	$1 billion
December 22, 2006	$1.5 billion
Late January, 2007	$1.9 billion
February 2007	$2.4 billion
March 2007	$3.1 billion
April 2007	$3.5 billion
May 2007	$4 billion
January 2008	> $4 billion
April 2008	$4.3 billion
May 2008	$4.7 billion

With the Dow and S&P 500 posting losses for the 12 month period since last May, it is encouraging to see WisdomTree's assets grow (albeit at a slower rate) and the launch of innovative new products from the company. However market conditions have taken a toll on many investment management companies like U.S. Global Investors (GROW), Brookfield Asset Management (BAM) and WisdomTree (WSDT.PK), making this young start-up one of the worst performing stocks in the SINLetter model portfolio and has taken a small toll on my personal portfolio as well.

The market is obviously not happy with the first quarter 2008 earnings report (.pdf) the company filed yesterday and the stock is down over 20% as I write this blog entry. With just $15.25 million in cash on hand and an operating loss of $10.27 million in Q1 2008, the company is being priced for bankruptcy or further dilution of existing shareholders through additional stock offerings. It is hard to imagine a company with legendary hedge fund manager Michael Steinhardt and Professor Jeremy J. Siegel at the helm going bankrupt, but so was the meltdown at Long Term Capital Management.

Besides cash, the company does hold $26.65 million in investments and revenue more than doubled in Q1 2008 to $5.375 million. With strong trading volume in its recently launched WisdomTree India Earnings ETF (EPI), there is a just a chance that the company may survive and prosper or get acquired like PowerShares.

Disclosure: I hold a long position in WisdomTree.

Comments

[Ric]

In reading the Q1 report it appears that they have a total of 41million in cash and investments. Their cash "burn rate" was about 5 million. Wouldn't that leave them w/ about 8 quarters befor having to go back to the market? Is my interpretation correct?

[Tim Eriksen]

I came to essentially the same conclusion on burn rate.

Asif your chart makes it look like growth has just slowed. By having nearly a year long gap it misses that AUM peaked last fall and then fell for a while while the markets tumbled. The volatility of growth makes it hard to estimate what future rate of AUM growth to use in a model. I still don't see cash break even until about $11 billion and profitability until about $15 billion.

[Ric]

I think the AUM growth is highly dynamic which not only depends on actual "units" sold but also whether the market is up or down. Clearly their early "growth" was the market going up. Notice that their AUM is close to 4.9 billion (as of yesterday). The foreign currency ETFs may have something to do with it but the market has also gone up? It would be nice if one were able to calculate the net ETF units bought by investors.

[Asif]

Ric, since operating loss included over $3 million in stock-based compensation, you are right that actual cash burn is around $5 to $6 million and even if AUM stays the same, they should have 7 to 8 quarters provided expenses do not increase (highly unlikely).

Tim, my table was based entirely on the numbers reported in WisdomTree press releases as I have not been able to find an alternate way to find their AUM. The gap from May 2007 to Jan 2008 was on account of the fact that I did not find AUM information in press releases during that time period.

Ric, where did you find the $4.9 billion AUM number from yesterday.

[Ric]

Asif, If you go to their website and click on ETF they update their AUM daily. The last one is 4.86.

[Asif]

Thanks Ric. Now I no longer have to depend on their press releases to get AUM information.