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Active Performance With WisdomTree

WisdomTree Investments (NASDAQ: WETF ) is an exchange traded fund (ETF) manager. They are the pioneers behind fundamentally-weighted ETFs that weigh stocks based on fundamentals like dividends and earnings, rather than market value. Their most popular products are international ETFs that hedge out currency movements. Their European and Japanese ETFs have been extremely popular with investors making them the 5th largest ETF provider in the US with nearly $60 billion under management. WETF have received the third largest inflows year to date behind only traditional market weighted indexes like Vanguard and BlackRock’s iShares. (click to enlarge) Source: WisdomTree investor presentation Unique among fund managers WETF is the only listed pure-play ETF manager. It’s a scarce asset with a superior business model to traditional managers. There is no key person risk, and because they construct the indexes have little chance of sustained under-performance. ETFs also benefit from first-mover advantage; once an ETF gains mindshare for its ticker, the volume and liquidity this generates makes it very difficult for new indexes to gain traction. Also unlike other fund managers, there are little concerns over capacity – an index is much more scalable than other investment strategies. No key person risk WETF have only 124 employees, there are no expensive fund managers and analysts to pay bonuses out to. The employees they do have are exceptional. The chairman and largest shareholder is Michael Steinhardt, a legend in the hedge fund world, who returned 24% per annum over a 28-year period. Jeremy Siegel, the Wharton professor and author of Stocks for the Long Run, is their investment strategy advisor. ETFs are the new mutual funds There are $2.1 trillion in ETFs in the US with $1.4 trillion in inflows since 2007 (see below). WETF has taken 4% of those inflows. This ETF trend is likely to continue with advisor moves to fee-for-service. The US ETF market grew at 18% last year. If market share continues to grow (only 13% see below), assuming that ETF inflows total $3 trillion over the next 10 years and WETF continues to take 4% of these inflows, WETF will eventually have hundreds of billions of funds under management. As funds under management triple, the stock should follow. Note these assumptions do not include the growth opportunities in Europe and the rest of the world who prefer the liquidity of ETFs based in the US. Their margins should also expand rapidly with this growth. It’s interesting to see that WETF is not only one of the fastest growing fund managers but also already one of the most profitable. Source: WisdomTree investor presentation The balance sheet is nice and simple. WETF is asset lite with $189 million in cash, free cash flow is very attractive due to tax losses. It’s also paying a 1.9% dividend. The risk is a weaker dollar and poor performance from the European and Japanese markets that will impact inflows. This is the key risk, but hedging is still low as a % of international ETFs being 15% of the international market. WETF have shown themselves to be innovative in coming up with new products, starting with a focus on dividends, emerging markets and currency hedging. Given their track record we believe they can come up with more fundamental products that the market needs. Outperforming with a passive investment WETF is the only listed pure-play ETF provider. Traditional funds management businesses are good businesses as they scale easily with very little people required. ETF providers have an even better business model. There is no key fund manager risk, it’s hard to underperform when you create your own benchmark, and indexes have few capacity constraints in how much capital they can manage. As advisers move to fee-for-service, the move to passive ETFs is a trend that will likely continue. WETF now has scale, but it’s also small enough to keep growing. As an active manager it’s a little ironic buying an ETF provider, but their superior business model should help WETF outperform the market. Disclosure: Decisive has a long position in WisdomTree ( WETF ). The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client’s or other person’s investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

An Opportunity During Cloudy Days

Summary The volatility in the markets continues . With anxiety arrives opportunities. Here is one ETF with relatively low volatility and high dividend yield. The stock markets continue to move aggressively up and down. The uncertainty regarding the FED’s action next week drives the investors to levels of high anxiety where every small publication or clue regarding the coming interest rate hike leads to high volatility. History showed us that volatility phases are not short by nature and the best example to use is the 2011 summer selloff that took place due to the European debt concerns, and moreover, due to the U.S. credit rating downgrade. The length of high volatility phase back than was about three months, from early August till mid October. As the markets continue to be highly volatile opportunities for the long term, patient, investor are piling up. The first group of candidates to explore are the group of Aristocrats. Dividend Aristocrats are companies that have increased their dividend payouts to shareholders every year for the last 25 years. Among the more familiar names in this group are The Coca-Cola Company (NYSE: KO ), Chevron (NYSE: CVX ), AT&T (NYSE: T ) and Johnson & Johnson (NYSE: JNJ ). Overall there are about fifty members in this prestigious list of dividend stocks that are included in the Dividend Aristocrats index. Since pursuing fifty stocks in not really achievable the next best thing is to pursue an holding in an ETF that follows this index. SPDR Dividend ETF (NYSEARCA: SDY ) is a passive ETF that seeks to replicate S&P High Yield Dividend Aristocrats Index. I have written about SDY back in April when concerns regarding a correction that was coming about arose. Based on etfdb.com SDY has total of 101 holdings. That means that beyond tracking the Dividend Aristocrats Index the ETF is following the “Index of Champions” which, based on David Fish’s latest article , includes 106 companies. In order to assess the attractiveness of SPY compared to other ETFs I used the list of my best Big Cap ETFs that were published back in July : Vanguard Value ETF (NYSEARCA: VTV ), Vanguard Russell 1000 Value ETF (NASDAQ: VONV ), Vanguard S&P 500 Value ETF (NYSEARCA: VOOV ) and SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). The behavior back in 2011: (click to enlarge) When looking at the graph which compares the performance of the five ETFs, going from January to October 2011, we can see that SDY delivered the best return compared to all benchmarks. During that time period between January to October it delivered a positive 1.8% while the other ETF delivered negative returns up to -3.9% . When zooming in to the crisis period, between June to October 2011 it was again SDY that delivered the best performance, dropping by only 2.2% while the other benchmark ETFs went down by up to 7.8% . When comparing the volatility of these ETFs using a Coefficient of Variation metric (Standard deviation divided by Average price) SDY also comes out with the lowest volatility score. Back to 2015: (click to enlarge) When comparing the same list of ETFs during a similar timeframe in 2015, going from January to September, SDY is still one of the better ETF performers delivering a -8.8% which is only second to SPY which delivered -6.3% during that timeframe. When zooming in to the crisis period, June to September 2015, SDY delivered the best return at -8.9% while the other ETFs delivered lower performance all the way down to -10.7% . While delivering the highest performance DY also demonstrated the lowest volatility during that timeframe of high volatility. Based on Morningstar.com SDY’s current dividend yield is at 2.46%. In 2014 the ETF delivered more that $3 to its shareholders and therefore I believe that the dividend return at these levels is higher that 3%. Conclusions: With high volatility arrive opportunities. SDY is an ETF that follows one of the most prestigious indexes. With lower volatility compared to its benchmarks I find it very attractive and waiting for it at $65. Happy investing Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

Exelon Presents Mixed Picture As Investors Are Advised To Wait

Company’s management seems committed to appealing against PSC judgment. Management continues to consider Pepco merger as key in achieving Exelon’s goal of re-balancing asset portfolio. Recent PSC decision to reject proposed merger has adversely affected Exelon’s plans to grow regulated operations. Exelon has to make important decision regarding capital deployment. Company’s risk profile has also increased. U.S. utility companies have been making aggressive efforts to increase their regulated business operations exposure, as forward power prices remain weak. Exelon Corp. (NYSE: EXC ) has also been working to expand its regulated operations, in an attempt to provide stability to its revenues and earnings. Consistent with its efforts to increase regulated operations, the company has been directing capital investments towards regulated operations. However, the company’s plans to increase regulated operations are adversely affected, as the Public Service Commission (PSC) of the District of Columbia rejected the proposed $6.8 billion Exelon-Pepco merger; Exelon does have a right to appeal against the judgment. However, Exelon’s future growth prospects will be seriously affected if the proposed merger is not completed. Therefore, I recommend investors to stay on the sideline until some clarity appears on the merger. Overhang Prevails Exelon’s financial performance in recent years has been volatile mainly because of weak and volatile forward power prices. However, the company has been undertaking prudent strategic decisions in recent years by focusing on increasing its regulated operations, which remains an important source for the future earnings growth. Exelon is known as the largest operator of nuclear power plants in the country; however, cheap coal and natural gas have rendered nuclear power uneconomical. The company has been making capital investments to strengthen and develop its regulated operations, where regulators guarantee investment returns. Moreover, in the recent past, the company was working on the proposed $6.8 billion Exelon-Pepco merger to provide stability and growth for its future earnings. Exelon’s management expects that the proposed merger will increase Exelon’s regulated utility earnings contribution to 65%-70% up from the current level of almost 55%. However, recently, the PSC rejected the planned merger, stating that it is not in the ‘public interest’; the decision has weighed on stock prices of both Exelon and Pepco, and I think Exelon’s stock price will stay under pressure in the near term. Exelon plans to appeal against the judgment, as it has a right to appeal against the decision in 30 days. The rehearing process is expected to take 6 months. However, the merger rejection has increased Exelon’s business risk. I think the merger now has 50% probability of being completed, and the main reason for pessimism is that the PSC has outrightly rejected the proposal rather than offering conditional approval. The company can push for the merger by settling with key stakeholders and presenting a case that the merger will bring notable benefits to customers. Moreover, in anticipation of finalizing the merger, the company has already raised almost $6 billion in long-term financing, including $1.9 billion raised through equity issuance and $4.2 billion through senior note issuance. If the company’s merger efforts are not successful, Exelon will face earnings dilution from the financing. Also, capital allocations have now become a key question for the company. I think if the merger does not materialize, the company can opt to allocate $3-$4 billion for share buybacks. Therefore, going forward, the company has to make important decisions regarding wealth maximization for its shareholders, therefore, I recommend investors to keep an eye on the management’s future decisions, which could have a notable impact on Exelon’s stock price. Separately, the company has to make another important decision, whether it will continue to operate its nuclear power plants or close them. Electricity generation by Exelon’s nuclear power plant has been uneconomical because of cheap natural gas and coal. The company spends nearly $1 billion per annum on its nuclear plants to keep them operational reliably and safely. In my opinion, if the proposed merger is not completed, the company should continue to look for other options to expand its regulated operations, as regulated operations will augur well for its earnings stability and risk profile. Summation The company’s management seems committed to appealing against the PSC judgment. The company’s management continues to consider the Pepco merger as key in achieving Exelon’s goal of re-balancing its asset portfolio away from volatile unregulated business, with weak growth outlook, towards a more stable and growing regulated operations. However, the recent PSC decision to reject the proposed merger has adversely affected the company’s plans to grow its regulated operations and will weigh on its future earnings growth and stability. If the merger deal does not close, the company has to make an important decision regarding capital deployment and its future growth will be negatively affected. Also, the company’s risk profile has increased. Therefore, I recommend investors to stay on the sidelines and wait for clarity on the matter. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.