ETF Report UK: WisdomTree Takes Root In Europe

ETF Report UK: WisdomTree Takes Root In Europe

In a crowded marketplace, the aim is to provide unique ETF solutions to investors, says Nik Bienkowski

Reviewed by: Kirstie Brewer
Edited by: Kirstie Brewer

[This is a sponsored article from the Spring 2015 edition of ETF Report UK, our quarterly magazine for UK financial advisers]

U.S. ETF issuer WisdomTree made its debut in the European market last year when it bought a majority stake in Boost ETP and created WisdomTree Europe. Four physically backed equity ETFs were launched on the London Stock Exchange in October 2014, followed by a further two emerging market ETFs in November, amid rising appetite for exposure to 'smart beta' and access to niche markets. The provider now has 10 ETFs listed in Europe.

With Boost ETP founders Hector McNeil and Nik Bienkowski at the helm of WisdomTree Europe, the products' collective assets have grown to $500 million.

According to WisdomTree, it is Europe's first ETF provider focussed on dividend weighted ETFs and the continent's first issuer of dividend weighted small cap ETFs, including Europe's first emerging markets small cap dividend weighted ETF.

In a crowded marketplace, the aim is to bring proprietary, unique solutions to ETF investors, said Bienkowski when he spoke to ETF Report UK. The WisdomTree European ETF product range debuted in October last year; what do these offerings bring to the marketplace?

Bienkowski: Our products bring a range of alternatively weighted benchmarks to some of the most popular asset allocations: U.S. equities, European equities and emerging market equities. In each of those three groups we have a large cap and a small cap product. All of our products are benchmarked to proprietary WisdomTree indices, which are weighted to have an income or dividend focus.

Essentially we are trying to offer something different; it isn't our objective to compete in the low value, low cost, core-type ETFs space. The market is already saturated with 20 to 30 of these types of offerings, and we don't believe investors need another Euro Stoxx 50 fund at 5 basis points. We want to give investors choice amongst their ETFs and also in the benchmarks they can invest in.

The term 'smart beta' has been popularised and is often used very loosely; our products are 'smart' because they use indices with dividend strategies that are not market cap weighted and result in a broad benchmark with low volatility and higher income. WisdomTree was a pioneer in this space, and we have been able to leverage off that.

We have WisdomTree's strong legacy in the U.S. behind us, too. The firm is the fifth-largest ETF issuer in the U.S. and eighth-largest globally; they have a track record going back to 2006 and have performed impressively. Before we had even launched WisdomTree in Europe or made an attempt to build a presence there, we had European investors holding the firm's U.S. ETFs. Which types of investors are showing the most interest in the new product range in Europe, and why?

Bienkowski: We are seeing retail money across private banks, IFAs and wealth managers. In the current low income world we live in, where bond yields are low or potentially negative, their clients are searching for other sources of yield and are turning to equities.

The downside of equities is they are more volatile than bonds and can pose more income capital risk.

However, our indices are very broad: they have exposure to more than 650 underlying companies. They have been constructed on a subset of dividend payers and our methodology means that we don't tend to have the new or high growth, riskier companies on our indices. Our products tend to have lower volatility but with higher income as a result. That is highly desirable in the current market.

We are experiencing solid growth and have seen some clients switch from U.S. products into Europe offerings, while others have started to increase their initial investments with us. What has recent performance been like?

Bienkowski: Generally, emerging markets have had disappointing performance; the Chinese economy is slowing down and markets like Russia have been hit hard.

We have had a higher exposure to Russia than most other indices but we maintain that the country will rebound and there are still good companies within our index which may have fallen in value but have maintained their dividends. We believe being overweight Russia will pay off and the index will outperform those with low allocations to Russia.

For those investors who have sold off their emerging markets exposure and are now looking to get back into the market, WisdomTree can provide a great solution.

Any indices that are weighted differently will always outperform or underperform another index over a particular time period, but in terms of general returns, our indices have done well since they launched back in 2006.

The other aspect it is important to consider is the level of volatility and the value of the trade-off between risk and reward. Generally, the companies that feature in our indices are paying dividends, and the indices are quite broad and tend to have slightly lower volatility than market cap weighted indices. So in terms of return per unit of risk, often our products and indices rank comparatively towards the top.

At the moment there is a difference of opinion about how equities will play out this year from a returns and volatility standpoint. Our products offer diversification and don't necessarily have to be a substitute to other ETFs and/or European equity holdings; they can be positioned alongside and complement. One of your new products offers emerging markets exposure. Are you seeing increasing demand for this?

Bienkowski: Emerging markets will continue to grow, and faster than the developed markets. While the rapid growth seen over the last 10 years was very steady, we still maintain the view that emerging markets are a good place to be if investors adopt long-term horizons. These countries are still quite well behind in terms of development, and they're resource rich in terms of human resources, be it in commodities or information technology capabilities. Given the volatility in those types of markets, investors should be taking a long-term view and consider emerging markets as part of a diversified portfolio. What do you think are the key opportunities in the European ETF marketplace at the moment? Why is now a good time to invest?

Bienkowski: Ultimately the ETF market in Europe is going to grow, and its percentage of investor assets will increase significantly over time too. For WisdomTree, the opportunities are in our ability to offer differentiated products. We might provide market cap indices in the future, but only if it offers something unique that is a solution to investors' needs or problems.

Advisers would recommend their clients to invest their assets over time and for a long period of time rather than invest everything at once and try to time the market. ETFs in general are a good quality product; they're transparent, liquid and robust, and offer lots of choice. It is also a competitive marketplace, which, for clients, means better products at better prices. Conversely, what are the key challenges that face the European ETF marketplace, and how can these be navigated?

Bienkowski: Regulation across a number of fronts is a key challenge. The increasing regulation on banks and the subsequent efforts to reduce leverage and balance sheets is making liquidity more difficult and more expensive. The seeding environment for ETFs is tougher as a result; you'll see ETFs now launching with a few million dollars, whereas 10 years ago they would have had $50 million to $100 million.

A challenge for the European marketplace specifically is that it is made of up many countries with different rules, languages and tax treatments. By contrast, the U.S. is the biggest market in the world but has one language, one regulator and near enough one tax structure. In Europe it is the complexity that proves a challenge, especially for non-European issuers looking to access the market for the first time. WisdomTree navigated this challenge by partnering with Boost and harnessing talent with local knowledge and experience in the markets. You need people who know what they're doing and have done it before. Do you think ETF investors could benefit from greater education about the ETF market?

Bienkowski: We believe investors shouldn't allocate money to something that doesn't have a clear and accessible hypothesis, and we are seeing more ETF issuers work together to cohesively educate the next level of investors who haven't had lots of information about ETFs before.

Now that IFAs no longer stand to receive commission from their investment products, ETFs are on a more level playing field, and those barriers to entry are eroding. Do you have any new products or plans in the pipeline?

Bienkowski: We are concentrating our efforts on expanding across Europe and offering something unique that is a solution to investors' needs or problems, as well as giving continental investors access to our products. It is not our goal to be 100 percent UK-focussed. Boost is listed in Germany, Italy and the UK, so we already have a footprint there.