ETF Ramblings: WisdomTree Earnings; Provider Profits; PIMCO Joins the Party

Aug. 5.08 | About: WisdomTree Investments, (WETF)

By Matthew Hougan

I'm just back from a one-week vacation (hence the blog silence), and I missed a lot while I was away.

I Like WisdomTree's quarterly earnings call. Dan Serra has an excellent piece on it on our site right now. WisdomTree (WSDT.PK) is doing a good job building its business—expanding its product line, moving into new areas, etc. But still, the business is a challenge. The company lost $8 million in the second quarter, on top of a $9.7 million loss in Q1. It will need to double its assets under management just to break even.

Which makes me wonder: How many ETF providers are profitable? If you look at my chart of ETF Industry Stats as of June 30, 2008, WisdomTree ranks ninth out of the 23 ETF providers in terms of assets under management. Only a handful of providers have more than $10 billion in assets.

Admittedly, WisdomTree's expenses are higher than most. It spends aggressively on advertising and product development, and has assembled a very senior staff.  It also (commendably) offers low expense ratios on its funds, which means it needs more assets to generate big revenues.

But if WisdomTree's profit/loss statement is any example, this industry is still very much in start-up mode, with most companies losing money on ETFs and hoping for a brighter future.

Speaking of start-ups, news that PIMCO is moving into ETFs strikes me as a potential turning point. There are very few details available about the reasons behind PIMCO's decision to launch a family of bond ETFs, but what the company did say was telling:

"We think [ETFs] are a very logical extension [of our business]. We view the ETF as an important delivery mechanism for our strategies," said Tammie Arnold, a managing director at PIMCO, in Murray Coleman's article on the news.  

In other words, PIMCO sees itself as a major player in the bond management industry, and because ETFs are playing an increasingly important role in this market, PIMCO believes it needs to launch ETFs ASAP.

You have to think that companies like PIMCO are examining the success of firms like Vanguard—which have attracted huge assets to their ETF portfolios without significantly undercutting their core funds business—and wondering, "why not me?"

Could folks like Fidelity, American Funds and others be next?