Why WisdomTree Investments, Inc. Dropped on Friday

Image Source: Getty Images.

What: Shares of WisdomTree Investments, Inc. (NASDAQ: WETF) were down more than 10% by market close on Friday after the company reported disappointing second-quarter earnings.

So what: WisdomTree Investments reported net income of $3.7 million, or $0.03 per diluted share in the second quarter, a marked decline from net income of $24.2 million, or $0.18 per diluted share in the year-ago period.

Declining net income was driven primarily from a decline in assets under management. WisdomTree reported that its U.S.-listed ETFs had just $38 billion in AUM at the end of the quarter, down 37.9% from the year-ago period, and down 14% from the sequential quarter.

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The drop in AUM was largely the result of customer outflows, as investors pulled their capital from its hedged currency ETFs. The company said that it lost $10.3 billion and $3.5 billion of AUM to outflows and negative market movement, respectively, year to date.

Now what: WisdomTree remains highly levered to its most successful currency hedged funds, which allow investors to purchase Japanese and European stocks in a way that is hedged to currency fluctuations. These funds made up $22.6 billion of the company's AUM at the end of the second quarter.

Image Source: WisdomTree Investments

The image above, which appeared in the company's quarterly presentation, shows that while ETFs as a whole continue to attract AUM, hedged equity ETFs -- WisdomTree's largest fee generators -- lost more than $7 billion of AUM industrywide in the second quarter.

As these currency-hedged funds are responsible for just under 60% of the company's assets under management, WisdomTree's quarterly results in the intermediate term will ebb and flow with inflows and outflows trends of the broader industry.

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