Industry Updates

ETF Securities acquisition by WisdomTree: a deeper look

Scott Longley


The profits and the numbers

Jersey-based ETF Securities has been acquired by WisdomTree for $611 million, ending months of speculation about the company's future.

The deal will bring in $17.6b of fresh AUM, raising WisdomTree's total assets to $66bn and make WisdomTree the ninth largest issuer in the world, behind France's Lyxor but ahead of Japan's Nikko AM.

It will also mean that WisdomTree acquires $11bn in gold-tracking ETFs, making it one of the largest gold ETF issuers in the world and the largest in Europe.

WisdomTree expects its earnings per share to jump 25% as a result of the deal, after one-off transaction costs are absorbed. It estimates the costs will be absorbed within a year.

The expected earnings boost is largely thanks to the high profit margins on ETF Securities' funds. ETF Securities products carry an average fee of 46 basis points - higher than the industry average and possible only in certain niches like commodities where storage and custodian fees put a floor on how low issuers can sink their fees.

ETF Securities EBITDA profit margins are roughly 47%, or $39 million a year.

"The acquisition makes for a stronger, more competitive global firm that is better diversified," said WisdomTree in a presentation today.

"[We are] well positioned to profitably grow in the world's two largest and most important ETP markets."

Industry analysis

The acquisition comes at a time that ETF issuer acquisitions are ramping up a gear.

In previous years, acquisitions focussed almost exclusively on smaller issuers and start-ups. But the past two years have seen middle-sized issuers fall into M&A nets. The past two years, Source and Guggenheim, both of which held tens of billions in AUM, have both been acquired. With ETF Securities acquisition that makes three in two years.

The deal also comes at a time when US issuers are hungry to make headways into the European ETF market.

European regulators are currently putting the finishing touches on Mifid II regulations, which will require financial advisers to be transparent about the costs they charge. Many US issuers are expecting Mifid to do to European ETFs what Obama's fiduciary rule did for US ETFs, which required advisers to act in their clients' best interest and gave the industry a shot of steroids.

Some US issuers are already priming their engines in preparation for Mifid, rolling out large product lines and expanded sales teams.

Who are ETF Securities?

ETF Securities was the world's first ETF issuer to list funds that track commodities - sometimes called ETCs, or exchange traded commodities. It remains by far the largest ETC specialist in Europe.

Most significantly, it was also the first issuer to list an ETC that tracked physical gold: Gold Bullion Securities (GBS), which first listed in Australia in 2003. GBS was revolutionary because it allowed, in effect, gold bars to trade on stock exchanges. It did this by allowing ETF owners to demand delivery of the gold bars that backed its ETFs. (Requests for physical delivery are rarely filed. To date there has only been one request - from a journalist, no less).

As a result of its early moves in gold, ETF Securities has some of the largest gold products of any issuer in the world.

ETF Securities European client base was also a point of attraction, WisdomTree said. The company has made efforts to grow its shadow on the continent in recent years, acquiring Source in 2016 and Boost ETP in 2014.

ETF Securities also offered diversification benefits, WisdomTree said. Gold is famously a hedge both against hard currencies and equity markets. As WisdomTree's two largest ETFs offer exposure to Japanese (DXJ) and European equities (HEDJ), the gold-focus of ETF Securities provides a natural hedge against WisdomTree's equity exposure.

"This transaction creates a leading independent global ETP provider which is well positioned to compete in the rapidly growing European ETP market," said Mark Weeks, CEO of ETF Securities.

"We have complementary expertise, product ranges and customer networks. We both continue to challenge the status quo to provide customers with a range of differentiated products. In this industry customers want and value firms like ours, which provide broader choice."

WisdomTree's share price rose 0.42% on Monday morning.

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