WisdomTree Investments Has an Emerging Markets Problem
There has been a lot of concern recently over troubling economic news coming out of some of the emerging markets. As a result, shares of emerging market stocks have been falling rapidly. Already this year, the iShares Emerging Markets ETF (NYSEARCA:EEM) is down 11 percent, and while I think some emerging markets look compelling, I also think many others are facing serious headwinds. Furthermore, many of the stocks found in this and similar ETFs are overvalued. Overall, the iShares Emerging Markets ETF trades at 19-times earnings and at more than 3-times book value. It has a dividend yield of just 2 percent. Given the chaos coupled with this overvaluation, it makes sense that investors are pulling their money out of emerging market stocks.
This is bad news for ETF manager WisdomTree Investments (NASDAQ:WETF). WisdomTree Investments issues ETFs that trade like stocks, but they actually have large portfolios of stocks and bonds. The company’s shares soared last year. Its profits more than tripled because one of the funds it manages — the Japan Hedged Equity Fund (NYSEARCA:DXJ) — became extremely popular as Japanese stocks soared while the currency plummeted.
What this masks, however, is the fact that WisdomTree Investments has a lot of exposure to Emerging Markets. According to the company’s fourth-quarter presentation, 24 percent of its total assets under management (or, AUM) were tied to emerging markets. However, the company’s emerging market funds have higher expense ratios and therefore generate higher revenues than the average WisdomTree fund. Consequently 30 percent of the company’s revenues last quarter were tied to emerging markets.
If emerging markets continue to fall this means bad things to come for WisdomTree investments. Suppose they fall another 10 percent. WisdomTree’s AUM would likely fall more than 10 percent. This is the case because not only would the value of the funds’ assets fall 10 percent, but investors would be pulling their money out of emerging market ETFs. Therefore, a 10 percent drop in emerging market stocks can lead to a 20 percent or higher drop in WisdomTree’s emerging market AUM, or about 5 percent of overall AUM.