On December 22, 2006, WisdomTree raised $56.4M in a private placement, spearheaded by AIG and Atlantic Pacific. WSAT issued 18,800,000 shares.

The dramatic increase of the equity base transferred the horizon of this young company.

Major Investors AIG Global Investment Group    } $56.4M private placement (December 22, 2006) Atlantic Pacific Investments

The Concept of the ETF Business

An ETF is the recent form of derivatives. It is the most recent, the simplest, the most easily accessible on the international markets. The recent merger of the NYSE and Euronext is a potential boom to ETF's. It competes with risky currency trading and creates the easiest way to trade commodities.

The size of the total market is $400 billion. A case can be for it to grow into a trillion-dollar market before the end of 2010.

WisdomTree can grow in five years to participate with $30 billion, representing a revenue base of over $100 million.

WisdomTree's History

WisdomTree is one of the first publicly-owned companies formed to function to manage ETF's. An ETF is a novel way to permit investors to participate in a special group of securities, domestic, foreign tied to currencies, tied to a particular commodity or restricted to a particular set of companies in a particular industry.

By definition, WisdomTree Trust is a Delaware statutory trust registered as an investment company with the SEC. Each separate WisdomTree ETF is a series of WisdomTree trusts. By definition, investors should consider their investment objectives, risk and expenses. Each ETF prospectus covers a particular investment mode. It discloses the particular investment risk, the buying interest in a special set of securities, and in case of a foreign ownership the risk of currency oscillation. The fund can focus on a single country, a sector, and other fund investments in smaller companies as well as foreign companies. The funds are distributed by ALPS Distributors, Inc.

ETF's cover currencies. For the first time investors can take positions in currencies without the usual leveraged trading risk. Instead of 5% downpayment, the ETF is just as liquid but subject to the same margin requirements of the New York Stock Exchange.

WisdomTree has registered twenty ETF's on June 16, 2006, listed on the NYSE. In less than four months of trading, the twenty WisdomTree funds attracted $700 million in assets. On October 30, 2006, ten additional WisdomTree trusts international sector ETF's were registered. The description of the ten appears in the table below.

Each ETF will focus on a specific industry sector tracking an underlying WisdomTree Index consisting of only international equity securities. The WisdomTree Trust international sector ETF's will be the first ETF's to offer pure international sector exposure. Existing ETF's are based on a "global" section model and contain a mix of both international and domestic securities.

The 10 new ETF's will have an expense ratio of .58% and represent the following international sectors:

• WisdomTree International Basic Materials Sector Fund (DBN)
• WisdomTree International Communications Sector Fund (DGG)
• WisdomTree International Consumer Cyclical Sector Fund (DPC)
• WisdomTree International Consumer Non-Cyclical Sector Fund (DPN)
• WisdomTree International Energy Sector Fund (DKA)
• WisdomTree International Financial Sector Fund (DRF)
• WisdomTree International Health Care Sector Fund (DBR)
• WisdomTree International Industrial Sector Fund (DDI)
• WisdomTree International Technology Sector Fund (DBT)
• WisdomTree International Utilities Sector Fund (DBU)

 

The management fee for an ETF oscillates between .28 to .58. It should be mentioned that the ten international funds would have a .58 expense ratio. At the time of writing, there is an additional thirty-one ETF's being registered, which are likely to be effective sometime in late December, 2006. It should be mentioned that WisdomTree out of its management fee subcontracts the cost of subcontracting Bank of New York. The bank sets up a funding trading trust for:

(a) executing orders,

(b) bookkeeping, and

(c) managing a number of shares in each ETF in correspondence with allocated shares from the various underlying companies. The Bank of New York fee is about 20 percent.

The following table therefore can illustrate the potential profit of WisdomTree from monies under management. In following the company since its inception, it should be mentioned that with a limited number of ETF's outstanding, the WisdomTree ETF's have managed one billion dollars in assets on November 30, 2006, and at the time of writing the figure approaches $1.5 billion.

With the expansion of the ETF movement and the number of ETF's under management, it is not inconceivable that by the end of 2007 WisdomTree (WSAT) could have nearly $5-10 billion under management. The following years $10 billion can also be increased in time. There is a strong net in-flow from existing clients and even greater from the diversification of the ETF's, or rather what's called asset diversification policy.

While an ETF is basically an open-ended fund, it provides investors with the possibility of investing in a particular segment of the market easily. Since the ETF's are listed on either the NYSE, the American Stock Exchange or the London Exchange, the marketability is a factor.

The ETF movement    

In 1993, the American Stock Exchange pioneered the concept of a tradable basket of stocks with the creation of the Standard & Poor's depository receipt, exchange traded funds, ETF's. Ever since it has continued to grow in number. In July, 2006, the total amount of money was $337 billion. The ETF's which used to have international institutions as major clients have become the darling of individual investors. Although the American Stock Exchange is the father of ETF's, it has grown rapidly elsewhere. Some of the most popular ETF's are listed in Table 3.

Attention should be paid to the various gold trusts which became an everyday trading vehicle to entities and individuals who raise the commodity markets. Furthermore, foreign markets have outpaced the United States. ETF's focus on emerging markets, Asia, the Pacific, and now concentrate on commodities. When the silver ETF was formed, it has absorbed 100 million ounces of silver from the market, with the result that 10 percent of the yearly production went into the ETF and raised the price of silver from $7.00 to $14.00. This shows that the convenient way to permit anybody to buy silver, gold, a foreign country, real estate, attracts capital and consequently the ETF market is now an international phenomenon. The main players are listed in the table below. The total amounts to $400 billion.

The valuation of WisdomTree should be studied in contrast to the growth of the ETF movement.

WSAT is not only an operating entity but a fast accumulator of cash.

The market has its own momentum to back a winning idea.

When I came to America in 1964, A.W. Jones, a hedge fund with $30 million, was a serious market player. Today the hedge fund industry amounts to probably $1.5 trillion and it participates meaningfully in the international markets.

Twenty-five years ago the so-called LBO funds, spearheaded by KKR, didn't amount to more than $10 billion. Today after twenty-five years, $100 billion LBO is being considered for Home Depot, and individuals such as John Castle, a former president of Donaldson Lufkin is known to handle along $8 billion worth of assets and Sam Heyman, a former president of GAF, is now the second largest stockholder of the London Stock Exchange.

Basically, both the LBO and the hedge fund business, unusual to many, not only stayed but prospered and grew.

The ETF movement has various advantages over the previously mentioned two.

1. It is easy to comprehend by anyone, even the least sophisticated investors.

2. It's marketed with great skill and diversified forces on listed exchanges.

3. It replaces the detailed research and detailed decision-making from investments while providing a vehicle for the average investor, the sophisticated investor, for foreign investors to put their dollars where they want to.

4. Foreign investment has never been more powerful than today. The London Economist estimates that by the end of 2007, the Chinese will have investable surplus funds of $700 billion. At the same time, the Middle Eastern oil countries will have $1.7 trillion. This is $2.4 trillion in total.

When we take into account that the ETF movement is basically five years old, and the hedge fund business, even on a large scale, is let's say twenty years old. The ETF movement is probably not more than 20 percent of the hedge funds' money, we must conclude that the ETF's have a great role to play in moving capital all over the world at great speed, in great quantities, and with great efficiency.

The Role of WisdomTree Investments    

Even though WisdomTree is a young company, its management is a group of remarkable talents. The president, Jonathan Steinberg, has followed and participated in the investment business from the age of twenty. Michael Steinhardt does not require any introduction. He's a legendary investor and former hedge fund manager, and a lifelong participant in the investment scene in New York. Arthur Levitt was head of the SEC, the Amex, and a founding member of the brokerage firm of Carter, Levitt & Weil.

The company has 700 million shares outstanding, with a distribution of ownership as per the following table. The intellect of management is unquestioned, and it is such financial sophistication which will be called into being as the story unfolds.

5. We take into account that the ETF movement would accelerate in growth and within 18 months WisdomTree will manage $15 billion.

6. At an effective 35¢ management fee, we are talking about a net income of $50 million and gross income of $85 million.

7. Assuming that money would flood the ETF's for several more years, the $50 would get a multiple of 30. After all, it is all cash income with limited amount of expenses, in an industry which will bring additional cash income under the corporate umbrella, for it is basically supervised by some of the most sophisticated and well-connected people in the financial world.

8. In the financial industry, to predict diversification is always very dangerous, but there is an expression that "Everything has its price". If we analyze the future, jumping 18 months ahead and seeing $50 million annual income and future increase of annual income of let's say $20 million in each year, the company could actually spend $100 million for an acquisition.

Thus, WisdomTree in the year 2008 would be in a position of having the possibility of $100 million cash over a period of years, half a billion dollar market cap, being a leading factor in a promising, cash-rich, growing industry.

Many years ago in the 1960s, when a young man, Saul Steinberg, father of Jonathan Steinberg, was in the same position with his first company called Leasco. His stock went from $5 to $280. He could issue convertible preferred shares. He had constant cash flow, and he acquired a medium-size but cash-rich insurance company - Reliance Insurance of Philadelphia in 1968.

History sometimes repeats itself, but one thing is sure -- in 1960 Saul Steinberg observed the possibilities of a growing financial conglomerate, and it is our assumption that WisdomTree, with its prestigious ownership and board of directors and the presidency of Jonathan Steinberg, may surprise the world in the first decade of the 21st century.

Of course, in the year 2007, Jonathan Steinberg has a company.

On December 22, 2006, WisdomTree raised $56.4M in a private placement, spearheaded by AIG and Atlantic Pacific. WSAT issued 18,800,000 shares.

The dramatic increase of the equity base transferred the horizon of this young company.

Major Investors AIG Global Investment Group    } $56.4M private placement (December 22, 2006) Atlantic Pacific Investments

The chart above shows that while all of these funds have performed well, growth in Latin America and Mexico, which was so strong in 2004, has slowed in the past year. Meanwhile, growth in the return of Asian funds has generally improved. Though iShares MSCI Brazil and iShares MSCI Mexico Index have done phenomenally well over the last year, their outperformance as a category has slipped. The Chinese ETF, iShares FTSE/Xinhua China 25 Index is the best performer on a one-year basis, and also shows the largest improvement, harvesting most of its growth over the past two years in the last 12 months.

Claymore ETF Plays on Uncovered Companies

Under the neglected-stock effect, companies that fly under Wall Street's reader without much analyst coverage outperform the better-known and heavily-covered names. It's based on the theory that companies with undiscovered potential will produce superior returns.

But the problem is there are 4,000+ stocks with no analyst coverage. Clearly, they can't all be great investments. The Claymore/Sabrient Stealth ETF aims to find the best investments that have yet to catch Wall Street's attention.

ETF's Bring the Bling

For the past couple of years, gold has been, well, golden as an investment. In late 2004, the streetTRACKS Gold Shares Fund became the first ETF that tracked a commodity. This fund gives investors a cheap and easy way to invest in gold and has accumulated billions of dollars in assets. Success breeds imitators, and in early 2005, Barclays Global Investors followed up with its own gold fund, the iShares COMEX Gold Trust. In April, 2006, Barclays provided investors another opportunity to shine up their portfolios when it launched the iShares Silver Trust. The SLV fund can be traded just like any other ETF, while the precious metal that the fund holds is safely secured in a vault.

EXCHANGE-TRADED FUNDS (ETF) CENTER

   Andrew Racz

(Article 45 - posted December 26, 2006)

e-mail: mlikar@aol.com

Home | Biography | Links | Contact

All Content & Articles of This Web Site

© 2005-2006 Andrew G. Racz