With exchange-traded funds and low-cost index funds projected to dominate the money-management industry in the future, the ETF specialist WisdomTree Investments (WETF) - Get WisdomTree Investments, Inc. Report is becoming an attractive takeover candidate, according to analysts for the Swiss bank Credit Suisse.
WisdomTree, based in New York, is the sixth-biggest ETF manager in the world, Credit Suisse wrote in a report to clients, and might offer a way for larger money managers to catch up in the business.
ETFs are similar to index funds in that they allow investors a low-cost way to bet on investment gauges like the S&P 500, but they can be traded like a stock on an exchange. For money-management firms, they don't cost a lot to create but they can be expensive to advertise and market, and a lot of ETFs are eventually folded due to lack of investor demand.
The biggest ETF providers - BlackRock (BLK) - Get BlackRock, Inc. Report , State Street (STT) - Get State Street Corporation Report and closely held Vanguard Group - are all giant companies that would be much more expensive to acquire.
An acquisition of WisdomTree "may provide the last opportunity for an outsider to enter the ETF business, which has very high barriers to succeed but low barriers to entry," the Credit Suisse analysts wrote. "We believe WETF would make an attractive takeout target for a global bank with wealth manager and asset manager."
Moody's Investors Service, the credit-rating firm, predicted last month that within the next three years ETFs and index funds would overtake the share of assets managed by human stock- and bond-pickers in traditional mutual funds.
So-called active funds - led by people who pick and choose assets and which typically charge higher fees - have long dominated the industry and currently control about 64% of the overall market, according to Moody's. But due to the popularity of the lower-cost "passive" funds like ETFs and index funds, the share of assets overseen by active managers has declined from nearly 90% in 2006, and it's projected to fall below 50% in 2021.
Active stock- and bond-pickers like Invesco (IVZ) - Get Invesco Ltd. (IVZ) Report , Affiliated Managers Group (AMG) - Get Affiliated Managers Group, Inc. Report and Janus Henderson Group (JHG) - Get Janus Henderson Group PLC Report have failed to stanch redemptions in recent years from their traditional mutual funds as investors disappointed with returns shifted money into index funds and ETFs, which are typically run by computers and promise market-matching returns in exchange for low fees.
Bloomberg News reported in February that WisdomTree was in talks last year to be acquired by JPMorgan Chase (JPM) - Get JPMorgan Chase & Co. (JPM) Report , the largest U.S. bank, but negotiations ended in December after the parties couldn't agree on a price.
Press officials for WisdomTree didn't immediately respond to a request for comment.
Last year, the Atlanta-based Invesco paid $1.2 billion for Guggenheim Investments' ETF business, which had $38.1 billion of assets under management.
But WisdomTree, which has about $57 billion of assets under management, currently has a market capitalization - the total value of its outstanding shares - of just $1.11 billion.
Credit Suisse projected that WisdomTree shares will climb to $8 each in the next 12 months, based on its earnings power alone. That represents a 12% premium over Monday's price of about $7.16.
A takeover, which likely would require an acquirer to pay a price premium, could provide "additional upside," according to the analysts.
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