by Aaron Levitt | December 4, 2013 6:00 am
It’s no secret that we love exchange traded funds (ETFs) here at InvestorPlace.
Funds like the Vanguard Total World Stock Index ETF (VT) can provide plenty of broad market exposure and be used as essential building blocks in both “core” and “explore” situations. Meanwhile, ETFs do all of this on the cheap — with substantially lower expense ratios than their mutual fund twins.
Those two factors — along with ETFs’ passive nature — can give regular retail investors a leg-up on many of their peers over the longer haul. Investors seem to like that idea and have plowed big bucks — around $1.7 trillion — into ETFs over the last few years.
Which raises the question — who’s making the money off all of that activity? That would be the ETF sponsors. For investors, their shares are just as lucrative as some of their funds. Despite their lower expense ratios, ETF sponsors make some pretty big bucks off their underlying funds. Those dollars have translated into some pretty hefty earnings and capital appreciation as the ETF movement has taken place.
And with ETF adoption not abating, those profits should continue to roll in for sponsoring firms. So if you like a company’s ETFs, you’ll probably love its stock. Here are four of the best.
Investment bank BlackRock’s (BLK) purchase of Barclay’s (BCS) struggling iShares unit during the Great Recession could have been one of the best forward-thinking business decisions of all-time. With more than $650 billion in ETF assets and more than 250 ETFs, BlackRock has cemented itself as the largest ETF issuer and manager on the block.
Its funds — like the iShares MSCI Emerging Markets (EEM) and iShares Russell 2000 (IWM) — are some of the most popular ETFs in their respective categories with both individual and institutional investors. That position and huge assets under management has allowed BLK to reap incredible profits from its ETF division.
For the latest quarter, BlackRock managed to generate about $727 million in fee income. That amount of cash helped drive BLK’s overall earnings and net income growth of 14% during the third quarter.
Earnings growth should keep on rising as BLK’s iShares division continues to see more long-term inflows from investors of all kinds. BlackRock reported that iShares has gained about $80 billion worth of new investor money over the last year. That amounts to an 11% annualized growth rate in new assets. With plans to launch an aggressive sales campaign, BLK predicts that it should continue to see that kind of growth for the foreseeable future.
Shares of BLK aren’t exactly cheap, with a forward P/E of 17. However, investors are getting the premier ETF asset manager at that price. As the industry grows, so will BlackRock’s position in the sector.
With the launch of the SPDR S&P 500 (SPY) back in 1993, State Street (STT) basically created the modern ETF industry. Today, the SPY is not only the largest ETF, but one of the most heavily traded as well. Since that time, STT has continued to develop its product line to focus on institutional and retail investors alike.
And while BLK has bumped State Street down to the No. 2 position in terms of ETF assets under management, STT is still no slouch. The firm has still nearly $370 billion tucked away inside its ETFs, and its line of Sector SPDRs remains the top choice for portfolios wanting to gain specific industry exposure. Over the last three years, STT’s nine sector SPDRs have seen a 30% compound annual growth rate in terms of asset inflows.
That, along with new products in the works — like a Beyond BRIC fund and Floating Rate Treasury fund — should help STT keep rolling in fee income for the future. Overall, management fees rose 10% for the latest quarter — primarily driven by its ETF business.
As one of the first “dynamic” or smart beta, ETF issuers Invesco’s (IVZ) successful PowerShares line of ETFs has managed to amass nearly $92 billion in ETF assets. Those profits put IVZ in a solid fourth place (behind privately held Vanguard) on the ETF league tables.
And new client money continues to pour into Invesco’s niche: specialty funds covering everything from water investments and alternative energy. IVZ saw its PowerShares QQQ (QQQ) pull in nearly $800 million in new investor money alone during the quarter.
Like BlackRock and State Street, Invesco continues see the fruits of those higher asset counts at its ETF business. Fee income continues to rise, and IVZ managed to produce a 34% rise in profits due to asset inflows. Again, the bulk of the increase was due to strong gain at its PowerShares ETF arm.
As for shares of IVZ, now could be the time to buy — the asset manager has suffered due to the exit of a key fund manager at its U.K. investment division. However, with ETFs clearly running the show at Invesco, the exit of Neil Woodford shouldn’t matter nearly as much as the market thinks. IVZ currently trades for a P/E of 15.
Shares of BLK, IVZ, and STT are great, but they aren’t necessarily “pure ETF” players. After all, those companies have plenty of assets in other investment businesses. For investors looking to play the straight growth in ETFs, upstart WisdomTree Investments (WETF) is the place to be.
Focusing on “fundamental” indexing, WisdomTree’s niche ETF business is growing like weeds.
WisdomTree offers 55 ETFs — such as the uber-popular WisdomTree Japan Hedged Equity (DXJ) — that use dividends, earnings or other factors to weight and create the index. These smart beta products offer the opportunity for outperformance versus traditional indices, and investors have been snapping them up. Inflows into WETF’s products for the third quarter rose 12% to reach $31.5 billion in total.
The beauty of that number is that WETF charges more for its ETFs — due to the special indexing — versus a bread-and-butter S&P 500 fund.
Those higher charges have helped WisdomTree triple its profits for the quarter. WisdomTree managed to earn $15 million or 11 cents per share for the last three months. That amount also managed to beat analysts’ predictions by a wide margin.
WETF shares are up a staggering 130% this year, but continued inflows should benefit the smaller issuer.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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