WisdomTree Inc (WT) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the WisdomTree second-quarter earnings conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, (technical difficulties) WisdomTree. You may begin.

Thank you. Good morning. Before we begin, I would like to reference our legal disclaimer available on today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are generally identified by terms such as believe, expect, anticipate and similar expressions suggesting future outcomes or events.

Forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks and uncertainties which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not or the timing that are by which results will be achieved.

A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, included but not limited to the risks set forth in the presentation and in the Risk Factors' section of the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Now it is my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

Thank you, Stu, and good morning everyone. This was another challenging quarter due to market volatility and the continued negative sentiment towards our two largest ETF exposures. However, we are seeing a number of encouraging signs, particularly with our US equity product suite, which has now reached their 10-year anniversary. Despite the short-term volatility, we've remained focused on executing our strategic growth plans to best position us for long-term growth in the ETF industry.

Now let's get into the results for the quarter beginning by first reviewing the US ETF industry statistics.

US ETF industry flows remain muted at $31.9 billion this quarter. On the right, you can see industry flows were driven to fixed income, US and developed world equities and gold ETFs. Hedged international equities experienced industry outflows again this quarter. These industry trends were a significant driver of our results from an operational and financial standpoint, which we can begin to review starting with the next slide.

Setting the backdrop, Japan equity markets declined 7% and the dollar weakened nearly 9% versus the yen in the quarter. European markets also declined nearly 5%. Our AUM inflows followed these market trends. As was already disclosed, our US AUM declined 16% to $37.5 billion, due to $4.9 billion of net outflows and $1.3 billion from negative market movement.

The majority of our outflows came from our two largest ETFs, hedge and DXJ. However, our US equity ETFs took in $500 million this quarter, which is encouraging on a number of fronts as we take a deeper dive into these flows on the next slide.

As you can see in the chart on the left on slide 5, we generated 4% market share in this very competitive category, more than our historical average with a particular strong market share in Mid and Small Caps. Our leading funds in these categories were DLN, DHS, DON and DES, all funds that have now hit their 10-year anniversary.

As you can see in the chart on the right, flows have accelerated in July and we have net inflows of nearly $1 billion into our US equity ETFs so far this year. In fact, since these ETFs hit their 10-year anniversary, average daily flows have accelerated to $19 million per day, much higher than their historical average.

We believe this is a combination of market sentiment for the US equities and the real-time performance track record of these Smart Beta strategies. We have aligned our distribution, research, and marketing teams to capitalize on the momentum we have and position these funds for accelerated growth.

As you can see on the next slide, the majority of our original ETFs have received either four or five Morningstar ratings. Not only are we proud of these ratings, but they are also very helpful as advisors transition away from mutual funds to ETFs.

Growing our existing product set is an important part of our strategic growth initiatives we laid out at the beginning of the year. Turning to slide 7, the objectives of these initiatives are to increase our target market share of inflows to 5% to 7%, diversify our asset base and stabilize our flows, and lastly, best position us for the long-term growth of the ETF industry.

On the product front, we continue to focus on staying ahead of the competition through innovation and diversifying our product set. This quarter, we launched two US-listed ETFs with investment strategies focused on dividends and dividend growth in the broad emerging markets and developed world, as investors continue to search for yield in this low interest rate environment.

We are strengthening our position with our core client segments by significantly increasing our marketing and sales related spending to support our brand, our products, and our clients. We're also a growing our distribution reach and diversifying our client base. This month we launched six ETFs in Canada to capitalize on the growth in their ETF market, due to recent regulatory changes, and have already raised nearly $70 million in initial seed.

We also recently announced a global product partnership with ICBC Credit Suisse to launch ETFs globally, based on the S&P China 500 index. And lastly we continue to broaden our distribution capabilities with a particular focus on the institutional channel where we have complemented our new head of the channel with expertise in consultant relations and the retirement space. So far this year we have added 10 people to our distribution team in the US, bringing the total to 65.

Of the $12 million to $16 million we earmarked for strategic investments this year, we have spent approximately $5.5 million and we have achieved the vast majority of our plans in the first half of the year. We expanded our distribution team, we launched 13 new ETFs so far this year, and we have expanded into Canada. Therefore, given the current market conditions, we are slowing down or eliminating some of the spend in the second half of the year with the goal of coming in at the low end of the range.

The next slides reflect our industry rankings. Our largest exposures were impacted the hardest by market sentiment, which has negatively affected our industry rankings. While we are not pleased with this ranking, we think it represents more structure and market conditions, and not the long-term growth prospects of our business.

On the next slide we show you our fund performance according to their Morningstar peer groups. These comparisons take into account fees and transaction costs and reflect how our equity, fixed income, and alternative ETFs performed against active and passive mutual funds and other ETFs. Since inception, 57% of our ETFs have outperformed their peer group, or 74% of the approximately $37 billion invested in our ETFs were in funds that beat their peers.

On the next slide we can review our results in Europe. Our European AUM continues to grow and has now surpassed $1 billion with the largest growth coming from our WisdomTree branded UKSIF products. These ETFs are also available now in Sweden and France, and we continue expanding both the WisdomTree and Boost product lineup.

In May, we announced we had accelerated the buyout of the minority shareholders in our European business. In connection with this, we took a $6 million charge this quarter to reflect the purchase and other related expenses. Going forward we will not incur any additional buyout charges.

As part of this buyout, we are transitioning two of our employees from the US to Europe, one to lead the overall business and another to lead the European distribution team. The early buyout and new leadership changes were made to better integrate our European business to drive future growth.

Now let's get into the financials, beginning on slide 12. The outflows and negative market movement led to a decline in our revenues of 31% from last year to $56 million this quarter. Net income declined to $3.7 million on a GAAP basis, or $9.6 million excluding the buyout charge. We earned $0.03 per share on a GAAP basis and $0.07 excluding the buyout charge.

Turn to slide 13. As you can see from both charts, we have seen a pick-up in our US equity AUM as a percentage of our overall AUM and revenues. Our average revenue capture was 52 basis points in the quarter, but it's ticked down to 51 basis points today due to a change in mix.

On the next slide you we can review our key market metrics. Gross margin for our US-listed ETF business was 81.5% this quarter, down due to lower average AUM. At our AUM levels today, gross margins are expected to be around 80%.

In the chart on the right, consolidated pretax margin was 19.9%. Excluding the buyout charge, margins were 30.6% this quarter. Our US-pretax margin was 35.6%. The declines from prior periods were due to lower revenue from outflows and negative market movement, not increased expenses, which we can review on the next slide.

First-quarter total expenses were $39.2 million. Compensation costs decreased due to lower incentive compensation accruals, given the net outflows for the first half of the year. Fund and third-party sharing costs declined due to lower average AUM. Professional fees decreased due to lower corporate consulting and one-time advisory fees related to our acquisition of Greenhaven.

Marketing and sales spending increased due to spending as part of our strategic growth initiatives. Operating costs for our European business increased due to additional fund launches and higher marketing and sales to support our new products. Expenses before the buyout charge were $38.8 million, down slightly from the first quarter.

On the right, you can see compensation as a percent of revenue for our US business was 23% for the first half, below our annual target of 24% to 28%, reflecting our current level of operating performance. Based on our results to date, I would expect to come in at the low end of the range of our guidance for the full year.

Let's review our balance sheet on the next slide. We ended the quarter with total assets of $248 million and cash and investments of $194 million. On the right, you can see this quarter we generated $22 million of cash from operations and returned $11 million back to shareholders through dividends to end the quarter with $175 million of cash. Let me point out this quarter while our earnings were below our dividend, when you add back stock-based compensation, which was $3.8 million, our cash earnings were actually higher than the dividend.

Let me take this opportunity to remind you how we think about capital management and supporting our dividend.

Our capital management strategy is formulated to account for long periods and different market cycles. We can adjust one component of our capital management to support our dividend that's needed for short periods, because we have that long-term view and strong cash balance. So we have the ability to adjust our buybacks or use some of our $175 million of cash to support our dividend if we have to.

The tailwinds and trends for our industry continue to remain strong. What we are dealing with currently is short-term sentiment challenges for our two largest exposures. Our business fundamentals remain firmly intact for the long-term.

On the next slide, let's go through our taxes. As we had this discussion over the last several calls, our remaining NOL is now $3 million, which means we will deplete our historical tax shield in the third quarter and begin to pay cash taxes. However, we continue to generate tax losses due to employees exercising options, investing in restricted stock.

The detailed information for that is on the right-hand side of the slide. Before turning the call over to Jono, let me give you update on where we are so far this quarter. As of yesterday our AUM is almost $40 billion. On the right, you can see the flows by category.

We have seen a recent turn in DXJ and continued strength in US equities. However, they have been offset by outflows and hedge. So in summary, despite the challenging quarter, we see encouraging signs in other parts of our product suite and we will continue to balance expense management with investments for growth.

Now let me turn the call over to Jono.

Thank you, Amit, and good morning everyone. Today I will be brief. As you know, the second quarter was a tough quarter with significant down flows. Extreme negative sentiment towards Japanese and European equities led to outflows in DXJ and hedge which more than offset our $500 million in US equity inflows.

But the financial results in the second quarter do demonstrate the inherent durability of the business model and underlying strength of the franchise. As Amit discussed, we maintained high margins relative to our peers and our balance sheet remains very strong. This has allowed us to continue to pursue growth opportunities like our recent entry into Canada and our exciting product partnership with ICBC Credit Suisse, who is the second-largest asset manager in China.

Today together we will launch the S&P China 500 fund exclusively around the world. This index includes A shares and S&P hopes this index can become the new benchmark for China.

This partnership combines WisdomTree's ETF expertise and distribution in the US and Europe with our peers, our partners, China expertise, and distribution in Asia. This global partnership would not have been possible without the continuous global investments that we have made over the last few years.

Earlier this year, we launched the first dynamically hedged currency ETF in the United States and have emerged as the early leader in this category. We took that methodology and launched the first dynamically hedged currency ETF in Canada. These are the kinds of synergies that we are achieving and which are necessary to be successful in the ETF industry around the world. These are just a few of the examples of our expanded capabilities.

Our investments in people, in new geographies, new products, and new technologies are transforming WisdomTree into a much more competitive and dynamic organization. I would encourage investors not to be blinded by short-term negative sentiment but to look to the long-term trends that are transforming the global asset management industry. There are very few firms as well-positioned as WisdomTree.

Now, let's open up the call to questions.

(Operator Instructions)

Craig Siegenthaler, Credit Suisse.

Just to start with fixed-income ETFs, It's been a very hot segment for some of your peers, and we can see you guys have been pretty active on the product innovation front with five net new ETFs over the last 12 months, but you really haven't seen any significant demands just yet, either in the Smart Beta products or even AGGY, which is putting up some very good relative numbers.

Why do you think inflow has been slow to develop in the segments, because actually I think flows have been a little bit negative here?

The hardest thing to do is to launch a new ETF start with 2 million in seed and establish traction, particularly when you are going into crowded spaces. If you look at the flow leaders in ETFs this year, the Agg has really been one of them.

To find a foothold within that very crowded space isn't easy. That said, AGGY just hit it's one year anniversary, got to $100 million in assets, and this is sort of how you build, normally, a successful ETF.

Sometimes it happens very quickly out of the gate, but this is the more normal path towards eventual success, and it should help us to sell the more recently launched Smart Beta fixed income or factor fixed-income funds that we launched more recently over time. It's a process. It is not easy, but we are very pleased with the product positioning that we have.

And just as my follow-up, I had a few questions on the S&P 500 China index, and I was curious on the competitive landscape.

What other ETFs exist that raise capital from outside of China and invest in China, and talking mainland China, and will this fund also raise capital from investors inside of China to invest in China? And then a lot of products that go into China actually have restrictions or capacity constraints. Will this ETF potentially have any of those?

It's an exciting partnership. In fact yesterday the fund was launched in the UKSIF format in London, which first of all from sort of a synergy standpoint, gives the European team a lot of energy and something truly proprietary and exciting to expand our conversations in that market.

ICIB Credit Suisse has the ability to sell in greater Asia, Hong Kong, and potentially mainland China as well. To your question of how many firms and fund have actually -- what they have done, these are very early days in bringing product to China and really we think it is all upside. Will also be launching the 40 Act version of this later this year.

We're very optimistic. It is very broad-based index with tremendous capacity when we have a very strong partner.

Chris Shutler, William Blair.

I guess bigger picture, guys, I just want to get your thoughts on ETF performance and obviously, you think it matters, but why? And many of your customers are advisors, so I guess in what cases do they care and don't they care? And the reason I ask, I would think that most ETF investors are buying the products based much more on the sort of strategy, expense ratio, and liquidity.

If you took that stance, then there would be no value to the active mutual fund industry. Do you think we have customer customers? We have the exact same customers. We're just getting the ones that are moving, that are forward-looking.

Performance always matters in asset management. Now, it is true though that this is an educational process, so indexing and ETFs historically have been Beta. You haven't really had differentiated performance really in any broad measure before WisdomTree. These 10-year records are stunning.

In fact, over the US equity funds that have achieved the tenure track record, five of them -- of the five that have the tenure track record, over the last five years they've beaten 95% of their index based and active managed peer sets, according to Morningstar, and three of them actually beat 99%. Those are the kind of numbers that really just attract demand, and it is particularly in a part of the market like US equities which is very crowded, you really do need something like this.

Other than price, those are the only two ways. You have to be first, you have to be cheapest, or you need something differentiated that really adds value. So we think that is -- the WisdomTree brand and the WisdomTree performance is really an asset that is developed, developing, and over the next 24 months or so, you are going to see a lot more 10-year anniversaries emerge.

Okay. Got it. I want to go back to the ICBC Credit Suisse relationship. How did that relationship development, and is there a potential to distribute some of your existing ETFs through ICBC in Asia?

If an early relationship, so really the relationship is focused on this first products and we will see how the partnership evolves.

Michael Cyprys, Morgan Stanley.

Just wanted to dive in a little bit more on the US equity inflows. Seems like you guys are getting a lot of traction there, $500 million inflows, haven't seen that in some time in that category there.

Can you talk a little bit about what is driving the success there and any change in terms of marketing or distribution strategy or client education that you've done recently that has perhaps led to that?

This is Luciano. So what's driving it really is, as Jono will mention, it is the cumulative performance of these funds that have rolls and a broad asset allocation model. So we're seeing them into DON, the MidCap dividend fund, DES, the SmallCap dividend fund, DHS, which is the high dividend in the LargeCap space, as well as DLN, which of course competes directly with the S&P 500 and the Rus 1000 value.

In terms of what we're doing, we have a coordinated campaign to educate advisors both about the history, the performance, the methodology, the yield, the growth of income on the funds, and we have done that through all of our medium; I mean we have written about it in research, we've written about it in blogs, we have done webinars, we have done conferences, the ads are on TV. We have also had specific email campaigns around these particular funds and their strategies, and the 10-year number is an important number.

It shows what the products can do over full market cycle, and one of the things we pointed out, the last 10 years, growth beat value in America. Financials underperformed the market in America, and yet these funds still were able to beat in many cases, not just the capitalated core, but the value cut of capitalated as well in an environment where growth beats value.

So I think people have a much greater appreciation of what these fund can do, how to use them in a portfolio, and the fact that the MidCap and the SmallCap can generate income in this environment above the S&P 500, above the 10-year treasury, just gives them another dimension, that I think, can play well in clients portfolios.

Let me just add one thing to what Luciana said. What's very exciting is the funds that we have just been talking about, they are not just a series of one-off funds, but they are a unified methodology that is an alternative to Vanguard's approach, and it really takes time to validate something that can deliver a better after-fee return than Vanguard.

It is exciting that its multi-funds, using the same approach that are achieving these results, and in fact, we have been focusing on the US, but this approach is global for WisdomTree. We have 10-year records on the developed world and over the next 24 months you will see our records in the emerging markets, using these same methodologies [appear]. So again, very exciting.

Interesting you mentioned Vanguard, where they have a direct-to-consumer approach. How are you thinking about longer-term, in terms of your go-to-market strategy? Today it seems like you're focused a lot on the financial advisor, but what are your thoughts around a more direct-to-consumer approach? You have a great website, you have a brand that's out there with the advertising campaign that you have. People are aware of it. What your thoughts there and just more broadly about direct-to-consumer, and then also digital strategy, too?

Our historic approach has been targeting the financial intermediary and the institutional investor. Our sales team focuses on those markets.

Self-directed retail sees our ads, whether it is on television or online or in print, and certainly have access to an incredible array of information and tools on our website, and we are building a database of retail at WisdomTree.com. But it is definitely a secondary market for us that is growing slowly and incrementally.

Now the truth is, the vast, vast majority of all money flows through the financial intermediary, and I think that will be true for some very significant period of time. I know that there is a belief and a hope that maybe sort of the robo-digital-distribution could lend itself to reaching sort of the millennial, the newer investor.

I'm sure it will, but in the scheme of things, they are not investor rich, and so that's a long, long game. Vanguard built their consumer business over like a 40-year business. So we are very much aware of the opportunities in digital and have been making part of our strategic spends for the last few years have been in enhancing the websites and the interface and predictive analytics and our -- getting our models out into investors' hands; but it is a process, and it builds over time cumulatively. Thank you.

William Katz, Citigroup.

Just to sort of circle back and start with the equity inflows, do you have a sense of what the market share is corded to date by chance? And I look around at some of your peers like at Federated, they put up $2 billion of similar typed of flows in their mutual funds. I'm just trying to see how strong the category has been versus your opportunity to take share?

Well, if you're asking us to comment on the quarter-to-date numbers ending July, they are not part of the presentation, but we do monitor the industry, and I think if you check today, we have done about $500 million into US equity. The ETF industry has done in the neighborhood of $20 billion to $25 billion.

So you can work out that percentage, but that percentage is higher than our historical market share in the category. So we are seeing an uptick in terms of the traction that we are getting.

And then when you step back a little bit, as good as your results are on the equity side, you are still on average, below your target range and in turn the annual growth for the industry is well below what you've anticipated, at least so far. What strategies would you might have to potentially look to take on market share? Or is it less about market share and a little bit more about unit diversified growth at this point? I am trying to understand maybe the priorities over the near term.

I think that first of all diversified strategies and market share go hand-in-hand, so we are committed to diversifying for sure and we were able to put down some very important categories that like are -- even though one of the earlier question was about the domestic fixed income -- though our flows have been small, we're laying the seeds for differentiated performance and future penetration in those themes.

The same thing in liquid alts, dynamic currency hedging, not taking an eye off of many of the core strategies, like we have spoken about, US equities. We're even starting to see a little bit of flow in EM. DEM has had recent inflows which we haven't seen recently because of the negative sentiment to emerging markets. But really both of them, market share and diversification are very, very important to us and we're trying to achieve both. Knowing that we have some challenges with the largest exposures that are just very much out of favor in the very short term.

And Amit, maybe one for yourself. I heard you on the fee rate coming down and your comp guidance and gross margin guidance. How about on the non-comp side? So what kind of flexibility you might have if AUM continued to be sort of range bound, just give us some macro dynamics?

Remember earlier this year we said we wanted to spend $12 million to $16 million on our strategic investments. We've made a lot of those investments already, and so we are going to be slowing down the spending in the second half of the year.

I think when you look at the spending in the second half, the big pieces of it will be from the US, and I think how we are targeting that is exclude comp, exclude fund-related cost; the second half of the year will probably be pretty flat with what you saw in the first half of the year. You make get a little bit of seasonality between Q3 and Q4, but we're trying to basically hold those non-AUM, non-comp expenses in the US roughly flat with the first half.

On the share count, which came up a little bit over the quarter, I guess there's no buyback. How do we think about the quarterly run rate? Is it flat again the rest of the year, or is there any upward migration? And then if we assume that you are sort of bouncing around at the level of dividend, what kind of share count creep would we expect next year?

Look, for next year a lot of it will depend upon incentive comp this year. Remember buybacks are two components. One is to eliminate share count creep when we issue stock, and the big [bump] and along with that will what our year-end bonuses will be. Second will be discretionary.

As I said in my remarks about our ability and importance for us to support the dividend. We can ramp down buybacks if we need to support the dividend. We can use our existing HECs to support the dividend.

I think the share count number that you see at the end of this quarter, roughly should be flat with the end of the year, absent maybe some major movements in AUM, and then we will see what the next year holds out to.

Okay, thank you for taking all my questions this morning.

Mac Sykes, Gabelli.

Just to expand on the robo-advising question. Some of the success, I know it's been small, but some of the success has come around or simplified branded strategies, if I could call it that, in terms of some of the ETFs or the -- I would say more gimmicky -- but is there an opportunity to focus innovation on sort of this aspect? I know it is initial at this point, but just more of a differentiated approach to the millennials?

I don't really break my worldview into millennial. I am always looking for investors, and however they want to be reached we want to reach them through that medium, but I don't do it by age.

And yes, it is not so different than let's say, just indexing in general. It used to be -- it started very, very vanilla, Vanguard-like. You saw in the earliest days of robo, they look very similar to like a Vanguard portfolio, but as there's been a proliferation of robo-advisors, they also need differentiation, just like the asset managers need differentiation; and so yes, we expect that there will be lots of opportunities for the WisdomTree -- WisdomTree or the WisdomTrees of the world to participate in this phenomenon.

Going back up to sort of 30,000 feet for a second, in a world of more solutions-based investing, how are you thinking about becoming a more holistic platform for perhaps a niche provider of specific products at this point? And is this actually an important aspect for ETF providers going forward?

When you talk about solutions, WisdomTree is participating in so many of the biggest themes in investing. So income, that is one of the most important themes for every advisor, every investor, and it's really one of the hallmarks of WisdomTree. Currency hedging, smart data factors, liquid alts or Japan, and we're in many, many important stories and a dominant or major force within those themes and we really are offering solutions.

Just as an example, last night we hosted a conference call with our head of Japan office, Jesper Koll, and Professor Jeremy Siegel, and hundreds and hundreds and hundreds of advisors talking about what was going to happen overnight with Bank of Japan and with the Fed and then we support it with product and research.

Really we are creating those solutions. It also ties into the models that we are producing, and probably our best most popular model would be the income model. It's really something we're very focused on. It's part of the capabilities that we are trying to develop with our strategic investments.

And just one last question. Is there any capacity constraint in terms of this new joint venture on the China aspect? Is this something you can ramp up pretty significantly on an institutional basis?

It has tremendous capacity. It is a huge exposure, and China has actually been as a theme very much out of favor. Where you are starting to see some flow into emerging market, and maybe we actually get lucky from a timing perspective, not versus like that AGGY question.

Sometimes you can get lucky on a timing, but it is a very broad-based index. The most inclusive, I would say, covering China today.

Adam Beatty, BofA Merrill Lynch.

Question about global distribution. Given the fairly vigorous activity over the last couple years and some of Amit's comments about initiatives, kind of -- some of the spending there easing, not that there won't be further growth and maybe some incremental investment, but in terms of planting the flag in different regions and countries across the world, are you at a point where you are kind of done for maybe the next 12 months or so? Or if not, what are the next targets or gaps that you see? Thank you.

So right now we are in the US market, the world's largest ETF market. A few years ago maybe investment in Boost giving us that toehold, and now we have $1 billion in Europe and very excited, which is the second largest market. Canada, we just launched, which is either the third or the fourth-largest market depending on whether you include Bank of Japan money.

Japan would be either the third or fourth market, whether you include Bank of Japan, they would be the third-largest market, without it would be the fourth-largest market. So we're right now in the world's largest markets and then interestingly, about seven years ago we started our relationship with the Compass Group for Latin America, so we made that investment seven years ago, we've been working with them.

They come to our sales meetings. We travel extensively throughout Latin America with them, and now that they have been with us for seven years and seeing the tenure track record, we're starting to see serious, meaningful flow out of that channel. So I do think that there is -- it is a finite world, and there's a tremendous disparity between what markets are receptive to ETFs and to this sort of fee-based business model, and so I think we have much of the critical mass of the global footprint in place today.

And then a question about the currency hedge international equity in the financial intermediary market that we have been talking about. How far along -- assuming there is a possibility of currency hedged basically supplanting non-currency hedged international. How far along are you in terms of educating financial intermediaries, FAs and what have you, and how much more remains to be done in that area to really establish currency hedged international as a corporate portfolio holding?

It is a great question and it's a little bit nuanced. I think we and others have done a tremendous amount in the last few years to highlight the benefits and in what market cycles currency hedging can be constructive to investors. It won't be a straight line, but the facts are the facts, and your question sort of reminds me of some of the questions people might have asked about ETFs more broadly 10 and 12 years ago.

You have seen some -- when we launched 10 years ago, ETF had 400 billion in assets and you would have said, well that's sort of a nice number. It is small. What have we done as an industry? Again, a lot of this is cumulative.

You are really having to break and change patterns, but because of the momentum that we have as an industry, plus the accelerant that comes from all this new global regulation, we are very, very optimistic that you will see acceleration into ETFs and that on merit, just like the performance question earlier, if these strategies, and we firmly believe from a research standpoint, currency hedging has a significant place in a diversified portfolio. We think that we are going to -- we have much more growth from here, particularly as we take money from unhedged active mutual funds, which really has close to $1 trillion in them.

Mike Grondahl, Northland Securities.

Do you have plans to ramp up marketing spend or advertising now that you have hit that 10-year anniversary for a bunch of the US funds? I don't know that I heard clearly if there is sort of a new plan there or an enhanced plan?

For those that have spent time with me particularly, I have very strong views on the value of marketing, and obviously, we have been marketing, particularly you have seen us on television from the very first day that we launched the firm. And right now you are seeing us on television creating ticker awareness around the US equity funds. That's ticker awareness.

That does not actually sell the fund. That just creates awareness. It is then all of the things that Luciana was talking about from a research standpoint, the hand to hand combat in the field, the webinars, the research, the conference calls, all of the things that we're doing, the models -- so we are not changing, upping the spend.

I mean we are incrementally year over year increasing the spend, but we are not doing something around sort of the brand or the 10-year anniversary specifically from a sort of above the fold or visual on television. We're still keeping that to be sort of ticker awareness type ads.

It is a little bit subtle, but we are really bringing a lot of attention to it through all of the mediums. It's just taking a percentage of the existing ad spend instead of adding to the ad spend.

The slower investment spend in the second half, is that primarily because you've kind of frontloaded the spend or because you are pushing a few things to next year?

A lot of it is because we did the important investments in the first half of the year, right? We expanded our distribution team. We got into the channels that we wanted to get into. We launched in Canada. We got a number of products -- important products -- out into the market, and so now we feel with those important things behind us we can slow down the spending in the second half of the year, being cognizant of the market conditions.

Robert Lee, KBW.

Most of my questions have been asked, so I'm just curious -- your latest thoughts or insight into some of the FCC proposals that have been out there around derivative reviews in 40 Act products, I guess liquidity also. And obviously, it wouldn't have impact a lot of your ETFs, but your thoughts on -- your current understanding on where that stands. And, your thoughts about how that may or may not impact some of your existing strategies, or how do you incorporate that into how you are thinking about developing new strategies?

This is Jono. First we would have liked to have made your FinTech index, so we want to talk to you about that.

(laughter)

But in terms of new regulation liquidity and derivative, so as you correctly stated it is not an ETF regulation. It's much broader than that. Much of what they are trying to do is about transparency and liquidity, and so it actually plays to the ETF structure, so in many ways responding to the new regulation will be easier we think for us than for many others.

In terms of -- I think that there is a industry optimism, I would say, that the rules themselves are emerging a little more common sense and product friendly than initially proposed, so that's, I think, a positive. If think, of you think about it from the DOL rule. So the DOL rule was focused on the distributor, the advisor and it was tremendously disruptive -- very, very constructive for ETFs, but disruptive.

And I would say, that even though there is optimism that the rules on liquidity and derivative are moving into the right directions, those rules are actually targeting the active management firms. And again, I think it is going to be incredibly disruptive for many, and I think this is another accelerant of ETF adoption. As many of the largest traditional firms are dealing with trying to be more ETF-like, more transparent and liquid; we can just go about doing our business.

I think it's a really very, very positive though not -- and our strategies will be compliant even with the bad or the original executions that were proposed. We feel fine with it, but we do think that there's going to cause more change -- more change in general, helping to transform at global asset management.

You guys have been -- one of the interesting things about your model, in my view, is that you have a lot of products and you don't have to put up the seed capital as traditional managers have to do when they launch a product. Are you seeing any change in market participants' willingness to provide even the minimal level of capital for new products?

Do you think -- any change at all in your future -- do you think in your potential needs to provide even modest levels of seed here or there?

First for the industry, from a seed standpoint, has changed tremendously over the 23 or 24 years that we have been in the business. I mean there were times -- when we launched, we launched with $350 million in seed or something. So yes, things are getting tighter. You now have 75 sponsors and 1,900 ETFs. There is a limit to how much capital is out there.

What is good for WisdomTree is we launched high conviction fund launches. We have a very strong relationship with the market-making community. We have been successful in developing and maintaining those relationships, but it is something to keep an eye on.

Like you said, it is a nice advantage that we have as an industry, but if it has to be -- so far no change other than you are launching with less money, which is what we have been doing for the last few years. We are sort of one of the known entities, and with our strong cash flow and balance sheet, if we had to put up seed, we would, but let's hope it does not go that way.

Keith Housum, Northcoast Research.

My question here is going to piggyback off the last question, and the China ETF, the S&P 500 with China ETF, it seems that it would be a more of a higher profile ETF launch for you guys. Is there is an opportunity to launch that with more seed money, and does that make a difference in terms of like making that initial impression to the market?

I think it launched with $8 million in seed, and more seed is better. Don't get me wrong. If you could launch with $8 million, better than $2 million. $50 million, better than $8 million.

In fact, we got very strong seed commitments for our Canadian launches. We launched nine strategies with CAD90 million, $70 million US, so already we're close to a top 10 player in Canada. Anyway, that's how it is.

In terms of -- one of the things that I've said to investors, which is more nuanced, the only you way you want to do Beta is if you could be first, right? If you could have offered us the S&P 500 in 1993, it would have been a good business idea to take it.

So here, we are being nuanced. We're trying to play what may be the new Beta play, and we're doing it with a period of exclusivity with S&P and trying to launch it globally and big. It is high-profile. It does have some seed. It is constructive -- all of this is just sort of being a very dynamic, competitive, organized ETF sponsor.

Great, and the follow-up to is you're launching in Canada. Is your expectation is that your growth through the rest of the year can follow you guys have been able to experience in Europe? Or what's been the initial impression from investors so far up in Canada?

We've actually only been in the Canadian market for I think less than two weeks, so it is very new. We got a very strong introduction.

One of the differences versus Europe is that it -- because of the geography of Canada to the US, and Toronto to New York, we get to use much of the infrastructure that is in place in the US. So we are just becoming a more efficient organization, but we also then used a very coordinated product strategy where we thought that the Canadians are actually currency-sensitive, and no one had done dynamic currency hedging and we thought we could really open up a new category and be first with it. So we're very pleased with the initial first few weeks of our launch.

Great. Thank you.

William Katz, Citigroup.

Two follow-ups, if I may. The first one is on Brexit, perhaps not much of an impact, but could you talk a little bit about how Boost may or may not be affected operationally, and then maybe what kind of market share opportunity might arise as a result?

We actually think we're pretty well-placed in our European business. Still the early days, but our funds are listed in Dublin, so they are in the EU. Our salespeople are in the UK, but remember we have an outsourced business model, and so all the regulatory licenses are held by a third-party.

We can move those licenses to a provider in the EU, so it would eliminate any issues that would happen from a distribution standpoint. Our people should be able to travel between the UK and the EU to sell the products. It is still the early days. The industry is watching, but unlike some of the larger firms, we think we're pretty well-positioned and can be very flexible.

Just looking at the most recent vintages of your newer products, so if you look at it on a year-by-year basis, nothing really scientific other than just looking by year -- I've noticed that a lot of new products have a lower fee rate than the average fee rate of the Company. How much of that is based on product mix versus competition? The reason I am asking is, I was just sort of listening to Jono talk about the 75 spots, 1,900 products. Just trying to think about the competitive pricing dynamic in a very large sense.

So I mean, what I've said to you and others on individual meetings, if you were to launch but 99 funds that we have today from scratch, they would be coming out at lower price points because they're coming into crowded markets. So yes, there are some times where, in a market that we were very early in 10 years ago, 8 years ago, 7 years ago, launching follow-on strategies in those themes today, they are coming in at lower price points.

Something that we're very, very comfortable with, and it is what it takes to be competitive. Again, that's the benefit of having started 10 years ago. That is why we try to do so much so quickly and are so hesitant to surrender the strategic growth spends just to show you a higher-margin in the short term.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Jonathan Steinberg for any closing remarks.

No closing remarks. Just thank you all for your support and interest, and we will speak to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone have a great day.