Scale and margin key in Wisdom Tree/ETF Securities deal

Scott Longley

What is clear from today's news of the $611m acquisition of ETF Securities by Wisdom Tree is the degree to which this is a commodity play with the US firm opting to buy rather than build a presence in the European exchange traded commodities (ETC) area.

"Wisdom Tree has realised that you need a breadth and depth of offering in order to be able to put the products in front of the fund pickers," says Deborah Fuhr from ETFGI. "You need a well-rounded family of products."

ETF Securities fits the bill due to its commodities focus, and in particular its gold fund. "This is about having the mega-funds, those with $1bn-plus of assets under management," Fuhr adds. "The real challenge is getting a fund to that level. If you get to that level, then you can dominate. And ETF Securities' gold product has reached that level. It is one of the dominant products."

Wisdom Tree made a similar move into the European ETC area of the market when it bought a majority stake in the Boost business in 2014 and subsequently swallowed the remaining quarter of the enterprise last year.

Speaking about the deal today, Jonathan Steinberg, chief executive at Wisdom Tree, said the acquisition was about scale, diversification and profitability and certainly the first of these is evident from the numbers. Adding ETF Securities' business to its own will bring in $17.6bn of AUM and will raise Wisdom Tree's total assets to over $66bn.

But if scale is one issue, but so is profitability and the margin that can be charged on ETCs, suggests Peter Sleep, senior investment manager at 7IM.

"The ETC, currency short and levered businesses are interesting as they are niche-like areas where there is relatively limited competition at present and fees have remained relatively high," he points out.

Another senior commentator within the market added that gold products in particular are a very profitable business for the providers. "The reasons for this deal are really about the margins in the ETF Securities' commodity products," they say. "The gold product is super-cheap to provide so comes with huge margins and lots of cashflow."

This is particularly important in a market where the pressure on the costs of exchange traded products is only ever in one direction. Says Fuhr: "We are in an environment where the downward pressure on fees is huge. That is across the board. Cost is often the first screen that people look at.

A good fit

Wisdom Tree made a similar move into the European ETC area of the market when it bought a majority stake in the Boost business in 2014 and subsequently swallowed the remaining quarter of the enterprise last year.

"The fit seems an excellent one for Wisdom Tree in that the bulk of ETF Securities' assets are in areas that are complementary to their recent Boost acquisition," said Sleep.

The move adds to the momentum behind consolidation within the ETF space; as was noted by David Stevenson in his reaction piece today on ETF Stream, in recent months we have seen Invesco Powershares snap up Source ETFs and the US-based Guggenheim ETFs business.

"We have had a fair amount of consolidation this year and the number of independent mid-sized firms has dropped, so I guess prices have gone up enough to entice the shareholders to sell," says Sleep. "Given ETF Securities' strength in commodities, the recent bounce in commodity prices may also have helped to get the deal over the finish line."

What this further consolidation also does is point to the degree to which mega-deals such as this leave behind a potential vacuum for smaller providers to fill. Such is the view of Hector McNeil, who was part of the team that sold Boost to Wisdom Tree and was part of the founding team at ETF Securities.

He has recently launched an ETF white-label provider HANetf which is aiming to exploit just opportunities for new entrants in the market. "We think this justifies out model," he says. "Too much consolidation reverses competition, but competition is healthy for the market."

Giving a nod to HANetf, Sleep adds that "as quickly as ETF issuers are acquired, new names pop up." He adds: "We have now seen Source and ETFS disappear as independent entities, but we have also seen JPMorgan, Liberty Shares and HANetf enter the market."

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