Form 10-K
false 20192019-12-31FY0000880631--12-31Large Accelerated FilerRepresents payments during the period April 11, 2018 through December 31, 2018.(Losses)/gains arise due to increases/(decreases) in the forward-looking price of gold and the magnitude of any gain or loss is highly correlated to the magnitude of the change in the forward-looking price of gold. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form
10-K
 
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
For fiscal year ended December 31,
201
9
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
For the transition period from 
                    
 to
                    
.
Commission File Number
001-10932
 
WisdomTree Investments, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
13-3487784
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
     
245 Park Avenue, 35
th
Floor
New York, New York
 
10167
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
212-801-2080
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class:
 
Trading Symbol(s)
 
Name of each exchange on which
registered:
Common Stock, $0.01 par value
 
WETF
 
The NASDAQ
 Stock Market LLC
 
 
 
 
 
 
 
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
  Yes    
  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
  Yes    
  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
  Yes    
  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
  Yes    
  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form
10-K.
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
 12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated
filer
 
 
Smaller reporting company
 
             
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
    No  
At June 
28, 2019
, the aggregate market value of the registrant’s Common Stock held by
non-affiliates
(computed by reference to the closing sale price of such shares on the NASDAQ Global Select Market on June 
28, 2019
) was $812,553,857. At February 
19
, 2020
, there were 156,436,919 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held in
2020
, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
 
 

Table of Contents
WISDOMTREE INVESTMENTS, INC.
Form
10-K
For the Fiscal Year Ended December 31, 2019
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Unless otherwise indicated, references to “the Company,” “we,” “us,” “our” and “WisdomTree” mean WisdomTree Investments, Inc. and its subsidiaries.
WisdomTree
®
and Modern Alpha
®
are registered trademarks of WisdomTree Investments, Inc. in the United States and in other countries. All other trademarks are the property of their respective owners.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form
10-K,
or Report, contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” and elsewhere in this Report. If one or more of these or other risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission, or the SEC, as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.
In particular, forward-looking statements in this Report may include statements about:
  anticipated trends, conditions and investor sentiment in the global markets and exchange traded products, or ETPs;
 
 
 
 
 
  anticipated levels of inflows into and outflows out of our ETPs;
 
 
 
 
 
  our ability to deliver favorable rates of return to investors;
 
 
 
 
 
  competition in our business;
 
 
 
 
 
  our ability to develop new products and services;
 
 
 
 
 
  our ability to maintain current vendors or find new vendors to provide services to us at favorable costs;
 
 
 
 
 
  our ability to successfully operate and expand our business in
non-U.S.
markets; and
 
 
 
 
 
  the effect of laws and regulations that apply to our business.
 
 
 
 
 
The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.
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PART I
ITEM 1.
BUSINESS
 
 
 
 
 
Our Company
We are the only publicly-traded asset management company that focuses exclusively on exchange-traded products, or ETPs, and are a leading global ETP sponsor based on assets under management, or AUM, with AUM of $63.6 billion globally as of December 31, 2019. An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof). ETPs are listed on an exchange with their shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes exchange-traded funds, or ETFs, exchange-traded notes and exchange-traded commodities.
Our family of ETFs includes funds that track our own indexes, funds that track third-party indexes and actively managed funds. Most of our equity-based funds employ a fundamentally weighted investment methodology, which weights securities based on factors such as dividends, earnings or investment factors, whereas most other ETF industry indexes use a capitalization weighted methodology. We distribute our ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers primarily through our sales force. Our sales efforts are not directed towards the retail segment but rather are directed towards financial or investment advisers that act as intermediaries between the
end-client
and us.
We focus on creating ETFs for investors that offer thoughtful innovation, smart engineering and redefined investing. We have launched many
first-to-market
ETFs and pioneered alternative weighting and performance methods commonly referred to as “smart beta.” However, our U.S. listed ETFs are not beta, but rather an investment approach we call “Modern Alpha,” which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective ETFs that are built to perform.
We strive to deliver a better investing experience through innovative solutions. Continued investments in technology-enabled services and our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors, are meant to differentiate us in the market, expand our distribution and further enhance our relationships with financial advisors.
We were incorporated under the laws of the state of Delaware on September 19, 1985 as Financial Data Systems, Inc. and ultimately renamed WisdomTree Investments, Inc. on September 6, 2005.
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Assets Under Management
WisdomTree ETPs
We offer ETPs covering equity, commodity, fixed income,
leveraged-and-inverse,
currency and alternative strategies. The chart below sets forth the asset mix of our ETPs for the last three years:
 
Our concentrations in the WisdomTree Europe Hedged Equity Fund, or HEDJ, our European equity ETF which hedges exposure to the euro, and the WisdomTree Japan Hedged Equity Fund, or DXJ, our Japanese equity ETF which hedges exposure to the yen, have declined dramatically over the last three years from 35% at December 31, 2017 to 10% at December 31, 2019, as negative investor sentiment toward these strategies led to net outflows of $13.0 billion during this timeframe. These outflows largely have been offset by strong inflows into our U.S. equity, fixed income, commodity and emerging markets products. During the years ended December 31, 2017, 2018 and 2019, net inflows were $3.7 billion, $3.2 billion and $3.3 billion, respectively, excluding outflows from HEDJ and DXJ.
Acquisition of ETFS
In April 2018, we acquired the European exchange-traded commodity, currency and
leveraged-and-inverse
business of ETFS Capital Limited, or ETFS Capital. Throughout this Report, we refer to the acquired business as ETFS and the acquisition as the ETFS Acquisition. Following the ETFS Acquisition we became the largest global independent ETP provider based on AUM, with significant scale and presence in the U.S. and Europe, the two largest ETP markets. The ETFS Acquisition diversified our investment theme concentrations by adding European-listed gold and commodity products.
Our Operating and Financial Results
We operate as an ETP sponsor and asset manager providing investment advisory services globally. These activities are reported in our U.S. Business and International Business segments.
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U.S. Business Segment
Our U.S. listed ETFs’ AUM increased from $35.5 billion at December 31, 2018 to $40.6 billion at December 31, 2019 due to market appreciation and net inflows into our U.S. equity, fixed income and emerging markets ETFs. These increases were partly offset by outflows from our international equity ETFs and HEDJ/DXJ.
 
Our U.S. Business segment included our Japan sales office, WTJ, which engaged in selling our U.S. listed ETFs to Japanese institutions. In July 2018, we determined to restructure our distribution strategy in Japan and expanded our existing relationship with Premia Partners Company Limited to manage distribution of our ETFs in Japan. As a result, WTJ has ceased operations and was liquidated during the year ended December 31, 2019.
WTJ reported operating losses during the years ended December 31, 2017, 2018 and 2019 of $4.6 million, $4.5 million and $0.6 million, respectively.
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International Business Segment
Our international ETPs’ AUM increased from $18.6 billion at December 31, 2018 to $23.0 billion at December 31, 2019 due to market appreciation and net inflows into our commodity ETPs. The increase in our AUM from December 31, 2017 to December 31, 2018 was primarily due to the $17.6 billion of AUM acquired in connection with the ETFS Acquisition.
 
The AUM shown above includes $0.3 billion, $0.5 billion and $0.8 billion of AUM from our Canadian business at December 31, 2017, 2018 and 2019, respectively. On November 6, 2019, we entered into a definitive agreement to sell all of the outstanding shares of our wholly-owned Canadian subsidiary, WisdomTree Asset Management Canada, Inc., or WTAMC, to CI Financial Corp. On February 19, 2020, we completed the sale of WTAMC, with CI Financial paying CDN $5.0 million (USD $3.8 million) in cash at closing, with total consideration ranging from CDN $7.0 million to CDN $13.0 million (USD $5.4 million to USD $9.9 million), depending on the achievement of certain AUM growth targets over the next three years. 
Our Canadian business reported operating losses during the years ended December 31, 2017, 2018 and 2019 of $3.6 million, $3.9 million and $2.8 million, respectively.
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Consolidated Operating Results
The following table sets forth our revenues and net income/(loss) for the last three years. Our operating results for the prior periods reported in this Report are not directly comparable to the current periods as the ETFS Acquisition was completed on April 11, 2018.
 
 
Revenues
– We recorded operating revenues of $268.4 million during the year ended December 31, 2019, down 2.1% from the year ended December 31, 2018 due to a 3 basis point decline in our average global advisory fee and lower average AUM of our U.S. listed products, partly offset by higher revenues earned from the ETFS acquired business, which were recognized for the entire year of 2019.
 
 
 
 
 
 
Expenses
– Total operating expenses increased 1.0% from the year ended December 31, 2018 to $214.9 million due to expenses associated with the ETFS acquired business which were recognized for the entire year of 2019 and higher compensation expenses. These items were partly offset by lower acquisition and disposition-related costs, professional fees, marketing and advertising expenses and fund management and administration costs associated with our U.S. listed products.
 
 
 
 
 
 
Other Income/(Expenses)
– Other income/(expenses) includes interest income and interest expense, (losses)/gains on revaluation of deferred consideration – gold payments, impairments and other gains and losses. For the years ended December 31, 2018 and 2019, the gain/(loss) on revaluation of deferred consideration – gold payments were $12.2 million and ($11.3) million, respectively.
 
 
 
 
 
 
Net (loss)/income
– We reported a net loss of ($10.4) million during the year ended December 31, 2019, compared to net income of $36.6 million during the year ended December 31, 2018. The net loss reported in the current year includes the loss on revaluation of deferred consideration – gold payments of $11.3 million and impairment charges of $30.7 million (See Note 26 to our Consolidated Financial Statements).
 
 
 
 
 
See
“Non-GAAP
Financial Measures” included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
Seasonality
We believe seasonal fluctuations in the asset management industry are common, however such trends are generally masked by global market events and market volatility in general. Therefore, period to period comparisons of ours or the industry’s flows and operating results may not be meaningful or indicative of results in future periods.
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Our Industry
An ETF is an investment fund that holds securities such as equities or bonds and/or other assets such as derivatives or commodities, that usually tracks the performance of an index and generally trades at approximately the same price as the net asset value of its underlying components over the course of the trading day. ETFs offer exposure to a wide variety of asset classes and investment themes, including domestic, international and global equities, fixed income, commodities, currencies and alternative strategies, as well as securities in specific industries and countries.
We believe ETPs, the vast majority of which are comprised of ETFs, have been one of the most innovative investment products to emerge in the last two decades in the asset management industry. As of December 31, 2019, aggregate AUM of ETPs globally was $6.2 trillion.
The chart below reflects the AUM of the global ETP industry since 2000:
 
Source: BlackRock
As of December 31, 2019, we were the fourteenth largest ETP sponsor globally based on AUM.
 
          Source: Morningstar
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ETFs have become more popular among a broad range of investors as they come to understand the benefits of ETFs and use them for a variety of purposes and strategies, including low cost index investing and asset allocation, access to specific asset classes, protective hedging, income generation, arbitrage opportunities and diversification.
While ETFs are similar to mutual funds in many respects, they have some important differences as well:
 
Transparency
. ETFs disclose the composition of their underlying portfolios on a daily basis, unlike mutual funds, which typically disclose their holdings every 90 days.
 
 
 
 
 
 
Intraday trading, hedging strategies and complex orders
. Like stocks, ETFs can be bought and sold on exchanges throughout the trading day at market prices. ETFs update the indicative values of their underlying portfolios every 15 seconds. As publicly-traded securities, ETF shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using limit orders, allowing investors to specify the price points at which they are willing to trade.
 
 
 
 
 
 
Tax efficiency
. In the U.S., whenever a mutual fund or ETF realizes a capital gain that is not balanced by a realized loss, it must distribute the capital gain to its shareholders. These gains are taxable to all shareholders, even those who reinvest the gain distributions in additional shares of the fund. However, most ETFs typically redeem their shares through
“in-kind”
redemptions in which
low-cost
securities are transferred out of the ETF in exchange for fund shares in a
non-taxable
transaction. By using this process, ETFs can avoid the transaction fees and tax impact incurred by mutual funds that sell securities to generate cash to pay out redemptions.
 
 
 
 
 
 
Uniform pricing
. From a cost perspective, ETFs are one of the most equitable investment products on the market. Investors in U.S. listed ETFs, regardless of their size, structure or sophistication, pay identical advisory fees. Unlike mutual funds, U.S. listed ETFs generally do not have different share classes or different expense structures for retail and institutional clients and ETFs typically are not sold with sales loads or
12b-1
fees. In many cases, ETFs offer lower expense ratios than comparable mutual funds.
 
 
 
 
 
ETFs are used in various ways by a range of investors, from conservative to speculative uses including:
 
Low cost index investing
.
ETFs provide exposure to a variety of broad-based indexes across equities, fixed income, commodities and other asset classes and strategies, and can be used as both long-term portfolio holdings or short-term trading tools. ETFs offer an efficient and less costly method by which to gain exposure to indexes as compared to individual stock ownership.
 
 
 
 
 
 
Improved access to specific asset classes
. Investors often use ETFs to gain access to specific market sectors or regions around the world by investing in an ETF that holds a portfolio of securities in that region or segment rather gaining exposure by purchasing individual securities or physical commodities.
 
 
 
 
 
 
Asset allocation
. Investors seeking to invest in various asset classes to develop an asset allocation model in a cost-effective manner can do so easily with ETFs, which offer broad exposure to various asset classes in a single security.
 
 
 
 
 
 
Protective hedging
. Investors seeking to protect their portfolios may use ETFs as a hedge against unexpected declines in prices of securities arising from market movements and changes in currency and interest rates.
 
 
 
 
 
 
Income generation
. Investors seeking to obtain income from their portfolios may buy fixed income ETFs that typically distribute monthly income or dividend-paying ETFs that encompass a basket of dividend-paying stocks rather than buying individual stocks.
 
 
 
 
 
 
Speculative investing
. Investors with a specific directional opinion about a market sector may choose to buy or sell (long or short) an ETF covering or leveraging that market sector.
 
 
 
 
 
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Arbitrage
. Sophisticated investors may use ETFs to exploit perceived value differences between the ETF and the value of the ETF’s underlying portfolio of securities.
 
 
 
 
 
 
Diversification
. By definition, ETFs represent a basket of securities and each fund may contain hundreds or even thousands of different individual securities. The “instant diversification” of ETFs provides investors with broad exposure to an asset class, market sector or geography.
 
 
 
 
 
ETP net flows experienced a modest improvement from the prior year as positive market performance overshadowed global trade uncertainties and growth concerns. The ETP sector of the asset management industry continues to demonstrate that it is favored amongst investors. According to the Investment Company Institute, from January 1, 2017 through December 31, 2019, equity ETFs have generated positive inflows of approximately $721 billion while long-term equity mutual funds have experienced outflows of approximately $776 billion. In addition, ETF fixed income flows are benefiting from a broader range of investors gravitating toward fixed income products in the ETF structure. We believe this trend is due to the inherent benefits of ETFs—transparency, liquidity and tax efficiency.
We believe our growth, and the growth of the ETF industry in general, will continue to be driven by the following factors:
 
Education and greater investor awareness
. Over the last several years, ETFs have been taking a greater share of inflows and AUM from mutual funds. We believe investors have become more aware of some of the deficiencies of mutual funds and other financial products and are increasing their focus on important characteristics of their traditional investments—namely transparency, tradability, liquidity, tax efficiency and fees. Their attention and education focused on these important investment characteristics may be one of the drivers of the shift in inflows from traditional mutual funds to ETFs. We believe as investors continue to become more aware and educated about ETFs and their benefits, ETFs will continue to take market share from traditional mutual funds and other financial products or structures such as hedge funds, separate accounts and individual stocks.
 
 
 
 
 
 
Move to fee-based models
. In response to preparing for compliance with the Department of Labor’s Fiduciary Rule to address conflicts of interest in retirement advice before it was vacated in 2018, and thereafter for compliance with Regulation Best Interest, which was adopted by the SEC in June 2019 and requires broker-dealers to act in the best interest of their retail customers when making a recommendation, many financial advisors changed the revenue model that they charge clients from one that is “transaction-based,” that is, based on commissions for trades or receiving sales loads, to a
“fee-based”
approach, where an overall fee is charged based on the value of AUM. This
fee-based
approach, which is in the spirit of Regulation Best Interest, lends itself to the advisor selecting
no-load,
lower-fee
financial products, and in our opinion, better aligns advisers with the interests of their clients. Since ETFs generally charge lower fees than mutual funds, we believe this model shift, which we anticipate will remain in place even though the Fiduciary Rule was vacated, will benefit the ETF industry. As major brokerage firms and asset managers encourage their advisors to move towards
fee-based
models, we believe overall usage of ETFs likely will increase.
 
 
 
 
 
 
Innovative product offerings
. Historically, ETFs tracked traditional equity indexes, but the volume of ETF growth has led to significant innovation and product development. As demand has increased, the number of ETFs also has increased and today, ETFs are available for virtually every asset class including equities, fixed income, commodities, alternative strategies, leveraged/inverse, real estate and currencies. However, we believe that there remain substantial areas for ETF sponsors to continue to innovate, including alternative- and investment theme-based strategies, digital assets, hard and soft commodities, and actively managed strategies. We also believe the further expansion of ETFs will fuel additional growth and investments from investors who typically access these products through hedge funds, separate accounts, stock investments or the futures and commodity markets.
 
 
 
 
 
 
New distribution channels
. Recently, several of the largest custodial platforms and online brokerage firms eliminated trading commissions for ETFs. Our arrangements with these platforms had offered us
 
 
 
 
 
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  preferred or exclusive access for our products, enabling investors to purchase ETFs without paying commissions. While exclusivity is no longer available, the elimination of commissions removes a component of trading costs previously affecting ETFs and is therefore a positive development for the ETF industry. ETF sponsors are also now better positioned to target access to all platforms, thereby creating additional opportunities. We believe the promotion of ETF trading by these platforms and online brokerage firms and their marketing of ETFs and model portfolios to a wider retail channel will contribute to the growth of ETFs. Additionally, digital wealth management is evolving, and online tools and robo-advisors are gaining wider acceptance with retail investors to assist with investment decisions. These advisors are increasingly utilizing model portfolios, which we believe also will contribute to the growth of ETFs. Institutional investors such as pensions, endowments and even mutual funds are also increasing their use of ETFs as trading tools as well as core holdings.
 
 
 
 
Changing demographics
. As the “baby boomer” generation continues to mature and retire, we expect that there will be a greater demand for a broad range of investment solutions, with an emphasis on income generation and principal protection, and that more of these investors will seek advice from professional financial advisors. We believe these financial advisors will migrate more of their clients’ portfolios to ETFs due to their lower fees, better fit within
fee-based
models, and their ability to provide access to more diverse market sectors, improve multi-asset class allocation, and be used for different investment strategies, including income generation. Overall, we believe ETFs are well-suited to meet the needs of this large and important group of investors. In addition, since many younger investors and financial advisors have demonstrated a preference for the ETF structure over traditional product structures, we believe that wealth transfers from one generation to another will also have a positive effect on ETF industry growth.
 
 
 
 
International markets.
We believe the growth of ETFs is a global phenomenon. While the U.S. currently represents the vast majority of global ETF assets, many of the same growth drivers powering the U.S. ETF industry are taking hold in global markets.
 
 
 
 
Changing regulatory landscape
. Many regulators globally are implementing rules that favor
fee-based
account structures, barring of commissions or incentives to advisors that put their interests ahead of clients and promoting trading of ETFs. We believe these regulatory changes are conducive to ETF growth.
 
 
 
Our Competitive Strengths
 
Well-positioned in large and growing markets
.
We believe that ETFs are well positioned to grow significantly faster than the asset management industry as a whole, making our focus on ETFs an advantage over traditional asset management firms. In the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage. We believe that our early leadership in a number of asset classes positions us well to maintain a leadership position.
 
 
 
 
Strong performance
. We create our own indexes, most of which weight companies in our equity ETFs by a measure of fundamental value and are rebalanced annually. By contrast, traditional indexes are market capitalization weighted and tend to track the momentum of the market. We also offer actively managed ETFs, as well as ETFs based on third-party indexes. In evaluating the performance of our U.S. listed equity, fixed income and alternative ETFs against actively managed and index based mutual funds and ETFs, 85.0% of the $38.4 billion invested in our U.S. listed ETFs covered by Morningstar and 67.7% (48 of 72) of our U.S. listed ETFs covered by Morningstar as of December 31, 2019 outperformed their comparable Morningstar average since inception. In addition, 35 of our U.S. listed ETFs and UCITS products are rated
4-
or
5-star
by Morningstar.
 
 
 
 
Differentiated product set, powered by innovation and performance
. Our products span a variety of traditional and high growth asset classes, including equities, commodities, fixed income, currencies and
 
 
 
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  alternatives, and include both passive and actively managed funds. Our innovations include launching the following industry firsts:
 
 
 
  the first gold and oil ETPs via our acquisition of ETFS;
 
 
 
  the first emerging markets
small-cap
equity ETF;
 
 
 
  the first actively managed currency ETF;
 
 
 
  the first ETF to provide investors with access to the Additional Tier 1 Contingent Convertible, or CoCo, bond market;
 
 
 
  one of the first international local currency denominated fixed income ETFs;
 
 
 
  the first managed futures strategy ETF;
 
 
 
  the first currency hedged international equity ETFs in the U.S.;
 
 
 
  the first 90/60 balanced ETF;
 
 
 
  the first multifactor ETFs incorporating dynamic currency hedging as a factor; and
 
 
 
  the first smart beta corporate bond suite.
 
 
 
Our product development strategy utilizes our Modern Alpha approach, which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform. Self-indexing is a significant component of this approach. The majority of our ETFs are based on proprietary WisdomTree indexes which we believe gives us several advantages. First, it minimizes our third-party index licensing fees, which increases our profitability. Second, because we develop our own intellectual property, we are intimately familiar with our strategies and able to effectively communicate their value proposition in the market with research content and support. Third, it can enhance our speed to market and first mover advantage. Fourth, because these indexes are proprietary to WisdomTree, we may face similar competition, but we never face exact competition. 
We believe that our Modern Alpha approach and our expertise in product development combined with our self-indexing capabilities provides a strategic advantage, enabling us to launch innovative ETFs.
 
Extensive marketing, research and sales efforts
. We have invested significant resources to establish the WisdomTree brand through online and television targeted advertising, social media, as well as through our public relations efforts. Close to half of our employees are dedicated to marketing, research and sales. Our sales professionals are the primary points of contact for financial advisors, independent advisory firms and institutional investors who use our ETFs. Their efforts are enhanced through value-added services provided by our research and marketing efforts. We have strong relationships with financial advisors at leading national brokerage firms, registered investment advisers and high net worth advisers. We believe that by strategically aligning these adviser relationships and marketing campaigns with targeted research and sales initiatives and products that align with market sentiment, we differentiate ourselves from our competitors.
 
 
 
 
Efficient business model with lower risk profile
. We have invested heavily in digital tools and data to market and sell our products and in the internal development of our core competencies with respect to product development, marketing, research and sales of ETFs. We outsource to third parties those services that are not our core competencies or may be resource or risk intensive, such as the portfolio management responsibilities and fund accounting operations of our ETFs. In addition, our licensing costs are moderated since we create our own indexes for most of our ETFs.
 
 
 
 
Strong, seasoned and creative management team
. We have built a strong and dedicated senior leadership team. Most of our leadership team has significant ETF or financial services industry experience in fund operations, regulatory and compliance oversight, product development and
 
 
 
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  management or marketing and communications. We believe our team, by developing an ETF sponsor from the ground up despite significant competitive, regulatory and operational barriers, has demonstrated an ability to innovate as well as recognize and respond to market opportunities and effectively execute our strategy.
 
 
 
Our Growth Strategies
We believe our continued execution will enable us to increase trading volumes and build longer performance track records, which should allow us to attract additional investors and, in turn, further grow our AUM. We will seek to increase our market share and build additional scale by continuing to implement the following growth strategies:
 
Foster deeper relationships through technology-driven solutions
.
We believe that the asset management industry is undergoing rapid change and technology is altering the way financial advisors conduct business. Our Advisor Solutions platform, which was named “Fund Innovation of the Year” at the 2018 Mutual Fund Industry Awards, is focused on providing technology-enabled solutions to help financial advisors address technology challenges and grow and scale their businesses.
 
 
 
The Advisor Solutions program includes:
  wealth investment research and ETF education;
 
 
 
  portfolio construction services such as the award-winning Digital Portfolio Developer, or DPD, an enhanced portfolio construction tool that assists financial advisors in analyzing an existing investment portfolio by examining the data and providing alternative portfolio approaches to consider in seeking to improve outcomes based on different measures. DPD won the “Thought Leadership Initiative of the Year” award at the 2018 WealthManagement.com Industry Awards;
 
 
 
  access to ETF model portfolios, which are currently available on a number of platforms, including TD Ameritrade, Envestnet and others. Our model portfolios are a natural extension of our research capabilities and provide advisors access to an open-architecture approach, a tenured team and a firm dedicated to innovation and value creation. Innovation is demonstrated in part by our recent launch of two model portfolios in collaboration with Professor Jeremy Siegel; and
 
 
 
  practice management resources, including access to thought leaders in retirement planning, leadership and behavioral finance.
 
 
 
 
Increase penetration within existing distribution channels and expand into new distribution channels and relationships with distribution platforms.
Recently, several of the largest custodial platforms and online brokerage firms eliminated trading commissions for ETFs. Our arrangements with these platforms, including TD Ameritrade, Charles Schwab and E
*
Trade had offered us preferred or exclusive access for our products, enabling investors to purchase our ETFs without paying commissions. While exclusivity on these platforms is no longer available, we are now better positioned to target access to all platforms, thereby creating additional opportunities to increase our market share by further penetrating existing distribution channels, expanding into new distribution channels and cross-selling additional WisdomTree ETFs. In addition, we continue to maintain preferred or exclusive access on the following platforms:
 
 
 
 
LPL Financial.
In December 2019, we became an inaugural partner on LPL Financial’s newly launched ETF network where advisors can trade 67 of our ETFs commission free.
 
 
 
 
BNY Mellon/Pershing.
In June 2019, we expanded our offerings of our U.S. listed ETFs on BNY Mellon’s Pershing Fundvest
®
ETF
no-transaction-fee
platform, adding 43 additional WisdomTree U.S. listed ETFs to the original eight added in January 2019.
 
 
 
 
Swissquote
. In March 2019, ten of our UCITS ETFs with 28 asset classes were added to the online platform of Swissquote, Switzerland’s largest execution-only broker.
 
 
 
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Ally Invest.
In August 2018, our full range of U.S. listed ETFs were made available commission-free on Ally Invest’s online trading platform.
 
 
 
 
Cetera.
In July 2018, our U.S. listed ETFs and our Advisor Solutions program were made available on the
no-transaction
fee product platform of Cetera Financial Group, the second largest independent financial advisor network in the nation. This allows for Cetera’s network of independent broker-dealers to access our diverse
line-up
of ETF products with no transaction fees.
 
 
 
 
Leverage data intelligence to serve and expand investor base and improve sales and marketing effectiveness
.
Our collaboration with IBM’s Advanced Analytics platform led to the development of a cognitive customer-focused lead prioritization system leveraging IBM Watson which has enhanced our distribution efforts. The system evaluates data across structured and unstructured sources such as historical investment data, market data and investor activity history, extracting behavioral insights, and is designed to enable our sales and marketing teams to optimize outreach to our current and potential investor base.
 
 
 
 
Launch innovative new products that diversify our product offerings and revenues
. We have launched many
first-to-market
ETFs in the United States and pioneered alternative weighting and performance methods commonly referred to as “smart beta.” However, our U.S. listed ETFs are not beta, but rather an investment approach we call “Modern Alpha,” which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform. We are also seeking to enhance the ETF structure through blockchain technology and digital securities and bring the benefits of the ETF structure to the digital ecosystem. To that end, we are pursuing the launch of “tokenized” or digital versions of existing WisdomTree ETFs on blockchain covering core building block asset classes, including gold and treasuries. We believe our track record demonstrates that we can create and sell innovative ETFs that meet market demand.
 
 
 
 
Selectively pursue acquisitions or other strategic transactions.
We may pursue acquisitions or other strategic transactions that will enable us to strengthen our current business, expand and diversify our product offerings, complement our Advisor Solutions program, increase our AUM or enter into new markets. We believe pursuing acquisitions or other strategic transactions is a cost-effective means of growing our business and AUM.
 
 
 
Regulatory Framework of the ETF Industry
Not all ETPs are ETFs. ETFs are a distinct type of security with features that are different than other ETPs. ETFs are
open-end
investment companies or unit investment trusts regulated in the U.S. by the Investment Company Act of 1940, or the Investment Company Act. This regulatory structure is designed to provide investor protection within a pooled investment product. For example, the Investment Company Act requires that at least 40% of the Trustees for each ETF must not be affiliated persons of the fund’s investment manager, or Independent Trustees. If the ETF seeks to rely on certain rules under the Investment Company Act, a majority of the Trustees for that ETF must be Independent Trustees. In addition, as discussed below, ETFs have received exemptive orders from the staff of the SEC which exempt them from certain provisions of the Investment Company Act; however, ETFs generally operate under regulations that prohibit affiliated transactions, are subject to standard pricing and valuation rules and have mandated compliance programs. ETPs can take a number of forms in addition to ETFs, including exchange-traded notes, grantor trusts or limited partnerships. In the U.S. market, a key factor differentiating ETFs, grantor trusts and limited partnerships from exchange-traded notes is that the former hold assets underlying the ETP. Exchange traded notes, on the other hand, are debt instruments issued by the exchange-traded note sponsor. Also, each of these structures has implications for taxes, liquidity, tracking error and credit risk.
Because ETFs do not fit into the regulatory provisions governing mutual funds, ETF sponsors and ETFs historically needed to obtain “exemptive relief” from the SEC from certain provisions of the Investment
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Company Act in order to operate ETFs, which could be costly and time consuming depending on the type of exemptive relief sought and type of ETF. In September 2019, the SEC approved Rule
6c-11,
commonly referred to as the “ETF Rule,” which is designed to simplify the rules governing ETFs. See “Business—U.S. Regulation and—International Regulation” below for more information about the ETF Rule and other regulations to which we are subject.
Our Product Categories
Commodity & Currency
The ETFS Acquisition provided us with an industry leading position in European listed gold and commodity products. The platform also offers products with exposure to other precious metals and commodities such as silver and platinum, oil and energy, agriculture and broad basket commodities. This category also includes our recently launched cryptocurrency product, the WisdomTree Bitcoin ETP. Our currency products provide investors with exposure to developed and emerging markets currencies, as well as exposures to foreign currencies relative to the U.S. dollar. Total AUM of our Commodity & Currency products was $20.3 billion at December 31, 2019.
U.S. Equity
We offer equity products that provide access to the securities of large, mid and
small-cap
companies located in the U.S., as well as particular market sectors and styles. Our U.S. Equity products track our own indexes, the majority of which are fundamentally weighted as opposed to market capitalization weighted indexes, which assign more weight to stocks with the highest market capitalizations. These fundamentally weighted indexes focus on securities of companies that pay regular cash dividends or on securities of companies that have generated positive cumulative earnings over a certain period. We believe weighting equity markets by dividends and income, rather than by market capitalization, can provide investors with better risk-adjusted returns over longer term periods in core equity exposures. Total AUM of our U.S. Equity products was $17.9 billion at December 31, 2019.
International Developed Market Equity
Our International Developed Market Equity products offer a variety of strategies including currency hedged and dynamic currency hedged products, exposures to large, mid and small cap companies in these markets and multifactor strategies. Included within this family are DXJ and HEDJ. Total AUM of our International Developed Market Equity products was $13.4 billion at December 31, 2019.
Emerging Market Equity
Our Emerging Market Equity products provide access to exposure of large, mid and
small-cap
companies located in Taiwan, China, India, Russia, South Africa, South Korea and other emerging markets regions. These products also track our own indexes, which are fundamentally weighted focusing on securities of companies that pay regular cash dividends or that have generated positive cumulative earnings over a certain period. Total AUM of our Emerging Market Equity products was $6.5 billion at December 31, 2019.
Fixed Income
Our Fixed Income products seek to enhance income potential within the fixed income universe. We offer a suite of rising rate bond products based on leading fixed income benchmarks we license from third parties. We also launched the industry’s first smart beta corporate bond suite. Other product offerings include those that seek to track a yield-enhanced index of U.S. investment grade bonds and international fixed income products which are denominated in either local or U.S. currencies. Total AUM of our Fixed Income products was $3.9 billion at December 31, 2019.
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Leveraged & Inverse
We offer leveraged products which seek to achieve a return that is a multiple of the performance of the underlying index and inverse products that seek to deliver the opposite of the performance in the index or benchmark they track. Strategies span across equity, commodity, government bond and currency exposures. Total AUM of our Leveraged & Inverse products was $1.1 billion at December 31, 2019.
Alternatives
Our Alternative products include the industry’s first managed futures strategy ETF and a global real return ETF. We also offer a dynamic long/short U.S. equity ETF, a dynamic bearish U.S. equity ETF and a collateralized put write strategy ETF on the S&P 500 index. We also intend to explore additional alternative strategy products in the future. Total AUM of our Alternative products was $0.4 billion at December 31, 2019.
Sales, Marketing and Research
We distribute our ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisers and institutional investors. Our primary sales efforts are not directed towards the retail segment but rather are directed towards the financial or investment adviser who acts as the intermediary between the
end-client
and us. We do not pay commissions nor do we offer
12b-1
fees to financial advisors to use or recommend the use of our ETFs.
We have developed an extensive network and relationships with financial advisors and we believe our ETFs and related research are well structured to meet their needs and those of their clients. We have taken steps to enhance and form new relationships through our Advisor Solutions program which focuses on providing technology-enabled solutions to help financial advisors grow and scale their businesses. In addition, senior advisors of ours participate as keynote speakers in various industry and WisdomTree hosted conferences and events. Our sales professionals act in a consultative role to provide financial advisors with value-added services. We seek to consistently grow our network of financial advisors and we opportunistically seek to introduce new products and services that best deliver our investment strategies to investors through these distribution channels. We have our own team of approximately 60 sales professionals globally as of December 31, 2019. We have restructured our U.S. sales force to enhance our interactions with financial advisors to further penetrate existing sales channels, and to better service new emerging distribution channels.
In addition, we have agreements with third parties to serve as the external marketing agents for the WisdomTree ETFs in Latin America, Israel and specific Asian countries, including Japan, as well as with select brokerage firms and independent broker-dealers to allow certain of our ETFs to trade commission free on their platforms in exchange for a percentage of our advisory fee revenues from certain AUM. We believe these arrangements expand our distribution capabilities in a cost-effective manner and we may continue to enter into such arrangements in the future.
Our marketing efforts are focused on three objectives: Increase our global brand awareness, leverage a robust-data driven digital sales experience to generate new clients and drive inflows to our ETFs and ETF model portfolios and retaining existing clients, with a focus on cross-selling additional WisdomTree ETFs. We pursue these objectives through an omni-channel marketing strategy targeting financial advisors. We utilize the following strategies:
 
Targeted advertising.
We create highly targeted multi-media advertising campaigns limited to established core financial media. For example, our television advertising runs exclusively on the cable networks CNBC, Fox Business and Bloomberg Television; online advertising runs on investing or
ETF-specific
web sites, such as www.seekingalpha.com and www.etfdatabase.com using targeted dynamic and personalized ad messaging.
 
 
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Media relations.
We have a full-time global corporate communications and public relations team who has established relationships with major financial media outlets. We utilize these relationships to help increase global awareness of the WisdomTree ETFs and the ETF industry in general in the United States and Europe. Several members of our management team and multiple members of our research team are frequent market commentators and conference panelists.
 
 
 
Database Messaging Strategy
. We have a database of financial advisors to which we regularly market through a series of messages across channels (email, display, site) that are triggered based on user interest and predictive analytics,
on-demand
research presentations,
ETF-specific
or educational events and presentations and market commentary from our senior investment strategy adviser, Professor Jeremy Siegel. Additionally, we communicate to our retail database about new product launches and provide ETF education.
 
 
 
Social media
. We have implemented a social media strategy that allows us to connect directly with financial advisors and investors by offering timely access to our research material and more general market commentary. Our social media strategy allows us to continually enhance our brand reputation of expertise and thought leadership in the ETF industry. For example, we have an established presence on LinkedIn, Twitter and YouTube, and our blog content is syndicated across multiple business-oriented websites.
 
 
 
Sales support
. We create comprehensive materials to support our sales process including whitepapers, research reports, webinars, blogs, podcasts, videos and performance data for our ETFs.
 
 
We will continue to evolve our marketing and communication efforts in response to changes in the ETF industry, market conditions and marketing trends.
Our research team has three core functions: product development and oversight, investment research and sales support. In its index and active equity product development and oversight role, the research group is responsible for creating the investment methodologies and overseeing the maintenance of indexes and active strategies. The team also provides a variety of investment research around these indexes and markets. Our research is typically academic-type research to support our products, including white papers on the strategies underlying our indexes and ETFs, investment insights on current market trends, and types of investment strategies that drive long-term performance. We distribute our research through our sales professionals, online through our website and blog, targeted emails to financial advisors, or through financial media outlets. On some occasions, our research has been included in
“op-ed”
articles appearing various publications. Shorter research notes are also developed to promote our ideas, which are distributed online through social media channels. Finally, the research team supports our sales professionals in meetings as market experts and through custom analysis on client portfolio holdings. In addition, we consult with our senior advisers, including Professor Jeremy Siegel, on product development ideas, model collaboration, and market commentaries.
Product Development
We are focused on driving continued growth through innovative product development including through our Modern Alpha approach which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective products that are built to perform. Due to our proprietary index development capabilities and a strategic focus on product development, we have demonstrated an ability to launch innovative and differentiated ETFs. When developing new funds, we seek to introduce products that can be first to market, offer improvement in structure or strategy relative to an incumbent product or offer some other key distinction relative to an incumbent product. In short, we want to add choice in the market and seek to introduce thoughtful investment solutions. Lastly, when launching new products, we seek to expand and diversify our overall product line.
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Competition
The asset management industry is highly competitive and we face substantial competition in virtually all aspects of our business. Factors affecting our business include fees for our products, investment performance, brand recognition, business reputation, quality of service and the continuity of our financial advisor and platform relationships. We compete directly with other ETF sponsors and mutual fund companies and indirectly against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions. The vast majority of the firms we compete with are subsidiaries of large diversified financial companies and many others are much larger in terms of AUM, years in operations and revenues and, accordingly, have much larger sales organizations and budgets. In addition, these larger competitors may attract business through means that are not available to us, including retail bank offices, investment banking, insurance agencies and broker-dealers.
The ETF industry is becoming significantly more competitive. Existing players have broadened their suite of products offering strategies that are, in some cases, similar to ours and large traditional asset managers are also launching ETFs, some with similar strategies as well.
Price competition exists in not only commoditized product categories such as traditional, market capitalization weighted index exposures, but also in fundamental or other
non-market
capitalization weighted or factor-based exposures. Fee reduction by certain of our competitors has been a trend over the last few years and continues to persist and many of our competitors are well positioned to benefit from this trend. Certain larger competitors are able to offer products at lower price points or otherwise as loss leaders due to other revenue sources available within such competitor that are available to us. Funds are being offered with fees of 20 bps or less, which have attracted approximately 76% of the net flows globally during the last three years. However, while these
low-cost
ETFs have accumulated a significant amount of AUM recently, we estimate that these same funds represent only approximately 32% of global revenues.
In the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage, as the first ETF in a category to attract scale in AUM and trading liquidity is generally viewed as the most attractive ETF. We believe that our early launch of ETFs in a number of asset classes or strategies, including fundamental weighting and currency hedging along with gold and commodities and certain fixed income categories, positions us well to maintain our position as one of the leaders of the ETF industry. Additionally, we believe our affiliated indexing or “self-indexing” model, as well as our more recent active ETFs, enable us to launch proprietary products that do not have exact competition and are positioned to generate alpha versus benchmarks. As investors increasingly become more comfortable with the ETF structure, we believe there will be a greater focus on
after-fee
performance, rather than using ETFs primarily as
low-cost
market access vehicles. While we have selectively lowered fee rates on certain products that have yet to attain scale, and there is no assurance that we will not lower fee rates on certain ETFs in the future, our strategy continues to include launching new funds in the same category with a differentiated exposure at a lower fee rate, rather than reducing fees on existing ETFs with a significant amount of AUM, long performance track records, and secondary market liquidity. We generally believe we are well positioned from a product pricing perspective.
While we are not immune to fee pressure, we believe our ability to successfully compete will depend largely on our competitive product offerings and our ability to offer exposure to compelling investment strategies with strong
after-fee
performance, develop distribution relationships, create new investment products, build trading volume, AUM and outperforming track records in existing funds, offer a diverse platform of investment choices, promote thought leadership and a differentiated solutions program, build upon our brand and attract and retain talented sales professionals and other employees.
U.S. Regulation
The investment management industry is subject to extensive regulation and virtually all aspects of our business are subject to various federal and state laws and regulations. These laws and regulations are primarily
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intended to protect investment advisory clients and shareholders of registered investment companies. These laws generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of our business and to impose sanctions for failure to comply with these laws and regulations. Further, such laws and regulations provide the basis for examination, inquiry, investigation, enforcement action and/or litigation that may also result in significant costs to us.
We are primarily subject to the following laws and regulations, among others. The costs of complying with such laws and regulations have increased and will continue to contribute to the costs of doing business:
 
The Investment Advisers Act of 1940
(Investment Advisers Act)
. The SEC is the federal agency generally responsible for administering the U.S. federal securities laws. WisdomTree Asset Management, Inc., or WTAM, one of our subsidiaries, is registered as an investment adviser under the Investment Advisers Act and, as such, is regulated by the SEC. The Investment Advisers Act requires registered investment advisers to comply with numerous and broad obligations, including, among others, recordkeeping requirements, operational procedures, registration and reporting and disclosure obligations.
 
 
 
The Investment Company Act of 1940 (ICA)
. Nearly all of our WisdomTree ETFs are registered with the SEC pursuant to the Investment Company Act. These WisdomTree ETFs must comply with the requirements of the Investment Company Act and other regulations related to publicly offering and listing shares, as well as conditions imposed in the exemptive orders received by the ETFs, including, among others, requirements relating to operations, fees charged, sales, accounting, recordkeeping, disclosure and governance. In addition, the SEC has proposed, and is expected to continue to propose, new and/or revised provisions under the ICA that may impact current and future ETF investments and/or operations.
 
 
 
Broker-Dealer Regulations
. Although we are not registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934, as amended, or Exchange Act, nor are we a member firm of the Financial Industry Regulatory Authority, or FINRA, many of our employees, including all of our salespersons, are licensed with FINRA and are registered as associated persons of the distributor of the WisdomTree ETFs and, as such, are subject to the regulations of FINRA that relate to licensing, continuing education requirements and sales practices. FINRA also regulates the content of our marketing and sales material.
 
 
 
Internal Revenue Code
. The WisdomTree Trust generally has obligations with respect to the qualification of the registered investment company for pass-through tax treatment under the Internal Revenue Code.
 
 
 
U.S. Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA)
. In 2012, the CFTC adopted regulations that have required us to become a member of the NFA and register as a commodity pool operator for a select number of our ETFs. In addition, in January 2016, we acquired the ownership interest in two commodity pool operators (one of which has since been dissolved) to ETFs that are not registered under the ICA and are thereby subject to additional requirements imposed by the CFTC and NFA. Each commodity pool operator is required to comply with numerous CFTC and NFA requirements.
 
 
 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
. This comprehensive overhaul of the financial services regulatory environment requires the implementation of numerous rules, which, as they continue to be adopted and/or modified, may impose additional regulatory burdens and expenses on our business, and may negatively impact WisdomTree ETFs.
 
 
 
Employee Retirement Income Security Act of 1974 (ERISA)
. We have established a platform for offering collective investment funds under the WisdomTree Collective Investment Trust, or CIT, to target the retirement sector. The CIT is exempt from registration with the SEC as a bank-maintained collective investment fund established for employee benefit trusts. As investment adviser to the CIT,
 
 
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  WTAM is subject to the fiduciary responsibility standards and prohibited transaction restrictions of ERISA and is required to comply with certain requirements under ERISA to satisfy those standards and avoid liability.
 
 
 
SEC Rule 6c-11 (ETF Rule)
.
In September 2019, the SEC approved Rule
6c-11,
commonly referred to as the “ETF Rule,” which became effective in December 2019 and ETF issuers have one year to implement. The ETF Rule is designed to simplify the rules governing ETFs. The rule includes several items that level the playing field for ETF issuers, including removing the need to file for exemptive relief in order to issue ETFs, which historically has been a costly and time consuming process, removing the regulatory distinction between actively managed and index-based ETFs (including removing specific requirements associated with self-indexed ETFs) and making custom baskets available to all issuers subject to policy and procedure requirements. The rule also requires issuers to disclose a number of items in a standardized format on a daily basis, including portfolio holdings and median
bid-ask
spread over the prior
30-day
period.
 
 
 
Exchange Listing Requirements
.
Each WisdomTree ETF is listed on a secondary market (each, an Exchange), including NYSE Arca, the NASDAQ Market and the BATS Exchange, and accordingly is subject to the listing requirements of these Exchanges. Any new WisdomTree ETF will seek listing on an Exchange and also will need to meet continued Exchange listing requirements. While the SEC has already approved rules for Exchanges to allow index-based ETFs and active ETFs to list that meet prescribed requirements (e.g., minimum number, market value and trading volume of securities in the new ETF’s benchmark index or in its portfolio, as applicable), these rules do not allow ETFs that do not meet the prescribed requirements without specific SEC approval. The SEC may ultimately determine not to allow such potential new WisdomTree ETFs or may require strategy modifications prior to approval. In November 2019, each of the Exchanges filed rule changes with the SEC to more closely align initial and continued listing requirements with the ETF Rule, which we view as a positive development, although it is unclear when or if such rule changes will be approved by the SEC.
 
 
In addition, our common stock is traded on the NASDAQ Global Select Market and we are therefore also subject to its rules including corporate governance listing standards, as well as federal and state securities laws.
 
FINRA Rules
.
FINRA rules and guidance may affect how WisdomTree ETFs are sold by member firms. Although we currently do not offer
so-called
leveraged ETFs in the U.S., which may include within their holdings derivative instruments such as options, futures or swaps to obtain leveraged exposures, recent FINRA guidance on margin requirements and suitability determinations with respect to customers trading in leveraged ETFs may influence how member firms effect sales of certain WisdomTree ETFs, such as our currency ETFs, which also use some forms of derivatives, including forward currency contracts and swaps, our international hedged equity ETFs, which use currency forwards, and our rising rates bond ETFs and alternative strategy ETFs, which use futures or options. In 2018, FINRA requested comment on potential changes to a rule related to payments to market makers and the potential timing and/or consequences with respect to changes to such rule, if implemented, are unclear.
 
 
International Regulation
Our operations outside the U.S. are subject to the laws and regulations of various
non-U.S.
jurisdictions and
non-U.S.
regulatory agencies and bodies. As we have expanded our international presence, a number of our subsidiaries and international operations have become subject to regulatory systems, in various jurisdictions, comparable to those covering our operations in the U.S. Regulators in these
non-U.S.
jurisdictions may have broad authority with respect to the regulation of financial services including, among other things, the authority to grant or cancel required licenses or registrations.
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Jersey-Domiciled Issuers (Managed by WisdomTree Management Jersey Limited)
One of our subsidiaries, WisdomTree Management Jersey Limited, or ManJer, is a Jersey based management company providing investment and other management services to eight Jersey-domiciled issuers, or ManJer Issuers, of exchange-traded commodities, or ETCs, each of which was established as a special purpose vehicle to issue exchange-traded securities. All ETCs (with the exception of those issued by WisdomTree Issuer X Limited) are listed and marketed across the European Union, or EU, under Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 (as amended), or the Prospectus Regulation, and in compliance with the Prospectus Regulation Rules made under sections 73A and 84 of the Financial Services and Markets Act 2000, of the United Kingdom as amended, or FSMA. The U.K. Listing Authority, or UKLA, approves all ETC Base Prospectuses as meeting the requirements imposed under U.K. and EU law pursuant to the Prospectus Regulation. Such approval relates only to those securities to be admitted to trading on a regulated market for the purpose of Markets in Financial Instruments Directive (recast) – Directive 2014/65/EU of the European Parliament and the Council, or MiFID II, and/or which are to be offered to the public in any European Economic Area, or EEA, Member State. Each prospectus (apart from that of WisdomTree Issuer X Limited) is prepared, and a copy of it is sent to the Jersey Financial Services Commission, or JFSC, in accordance with the Collective Investment Funds (Certified Funds – Prospectuses) (Jersey) Order 2012. Each ManJer Issuer (other than WisdomTree Issuer X Limited) has obtained a certificate under the Collective Investment Funds (Jersey) Law 1988 (as amended), to enable it to undertake its functions in relation to its ETCs. The UKLA has, at the request of the relevant ManJer Issuer, notified the approval of the Base Prospectus in accordance with the Prospectus Regulation to other EU listing authorities, including Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden and the U.K., by providing them with certificates of approval attesting that the Base Prospectus has been prepared in accordance with the Prospectus Regulation. Each issuer may request the UKLA to provide competent authorities in other EEA Member States with such certificates for the purposes of making a public offer in such Member States and/or for admission to trading of all or any securities on a regulated market. The WisdomTree Bitcoin securities issued by WisdomTree Issuer X Limited do not constitute a collective investment fund for the purpose of the Collective Investment Funds (Jersey) Law 1988 (as amended) as they are investment products designed for financially sophisticated investors only and they satisfy the requirements of Article 2 of the Collective Investments Funds (Restriction of Scope) (Jersey) Order 2000. A copy of the WisdomTree Issuer X Limited prospectus is delivered to the Registrar of Companies in Jersey in accordance with Article 5 of the Companies (General Provisions) (Jersey) Order 2002, and the Registrar has consented to its circulation. The JFSC has consented under Article 4 of the Control of Borrowing (Jersey) Order 1958 to the issue of the WisdomTree Bitcoin securities by WisdomTree Issuer X Limited. Currently, the prospectus of WisdomTree Issuer X Limited is approved in Switzerland only and WisdomTree Bitcoin securities currently are only listed on the SIX Swiss Exchange.
Pursuant to the UK European Referendum Act 2015, a referendum on the U.K.’s membership in the EU was held on June 23, 2016, with the majority voting to leave the EU. On March 29, 2017, the U.K. government exercised its right under Article 50 of the Treaty of the European Union to leave the EU (referred to as “Brexit”). The U.K. left the EU on January 31, 2020 with transitional agreements in place until the end of the year. It is expected that approval of the Base Prospectuses by the UKLA as outlined above will cease to be possible at the end of such transition period. We are working with an alternate EEA Member State regulator through whom we would seek approval and request passporting at the expiry of the transitional arrangements. Guidance released by the European Securities and Markets Authority, or ESMA, confirmed that it is not possible to receive a formal approval from an alternate regulator prior to the end of such transition period, but there may be further developments on this ESMA’s position regarding the transitional arrangements means that there may be a short time period, expected to be limited to one day, when the ManJer Issuers may not have EU prospectuses. If this period is extended for unforeseen reasons beyond one day, there may be an impact to the listing and distribution of our products.
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The ManJer Issuers are primarily subject to the following legislation and regulatory requirements:
 
The Companies (Jersey) Law 1991
.
Each ManJer Issuer is incorporated as a public limited liability company under the Companies (Jersey) Law 1991. Therefore, the ManJer Issuers are required to comply with various obligations under the Companies (Jersey) Law 1991 such as, but not limited to, convening general meetings, keeping proper books and records and filing financial statements.
 
 
The Foreign Account Tax Compliance Act, or FATCA
, which was passed as part of the Hiring Incentives to Restore Employment (HIRE) Act, generally requires that foreign financial institutions and certain other
non-financial
foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets. ETCs benefit from the so called “listing exemption” and Jersey local authorities have determined that for companies which can benefit from such exemption the filing of a nil report is optional.
 
 
The Common Reporting Standards, or CRS
, were developed by the Organization for Economic Cooperation and Development and is a global reporting standard for the automatic exchange of information. The ManJer Issuers will need to conduct FATCA style due diligence and annual local reporting in relation to financial accounts held directly and indirectly by residents of those jurisdictions with which the Foreign Financial Institutions (FFIs) jurisdiction of residence has signed an Intergovernmental Agreement (IGA) to implement the CRS. Unlike FATCA, there is no clear listing exemption available under the CRS so the ManJer Issuers are required to conduct full due diligence to identify such accounts and report on them on an annual basis to their local tax authorities, at least in respect of the certificated interests and primary market issuances. However, Jersey tax authorities have applied less onerous reporting obligations to interests such as ETCs that are regularly traded on an established securities market and are held through CREST, the U.K. based central securities depository.
 
The ManJer Issuers (other than WisdomTree Issuer X Limited) are also primarily subject to the following legislation and regulatory requirements:
 
The Prospectus Regulation
. The Base Prospectus of each ManJer Issuer has been drafted, and any offer of ETCs in any EEA Member State that has implemented the Prospectus Regulation is made in compliance with the Prospectus Regulation and any relevant implementing measure in such Member States.
 
 
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, known as the European Market Infrastructure Regulation (“EMIR”)
. EMIR, which became effective on August 16, 2012, provides for certain
over-the-counter,
or OTC, derivative contracts to be submitted to central clearing and imposes margin posting and other risk mitigation techniques, reporting and record keeping requirements. The clearing obligations under EMIR are still under discussion, and currently there are no mandatory clearing obligations in relation to equity, FX or commodity derivatives. The clearing obligation only applies to
EU-based
financial counterparties (defined as those authorized under MiFID, CRR, AIFMD, UCITS or insurance regulations) or those
non-financial
entities that have a rolling three-month notional exposure above a certain amount (between
1 and
3 billion, depending on asset class), which means that the ManJer Issuers are not directly subject to these obligations, but could indirectly be subject to them by virtue of their interaction with
EU-based
financial counterparties. In terms of reporting obligations, being
non-EU
entities, the ManJer Issuers are only indirectly subject to such obligations when they interact with their
EU-based
financial counter-parties. Each ManJer Issuer has adhered to the 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by the International Swaps and Derivatives Association, Inc.
 
 
Regulation (EU) No 596/2014 of the European Parliament and of the Council on market abuse (the “Regulation”) and Directive 2014/57/EU of the European Parliament and of the Council on
 
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criminal sanctions for market abuse (the “Directive” and, together with the Regulation, “MAD”)
. Obligations imposed on the relevant ManJer Issuer and distributor under MAD, which became effective on July 3, 2016, include the requirement to publish inside information in a public and timely manner, to prepare and maintain a list of insiders and to refrain from market manipulation.
 
 
Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (“BMR”)
. Supervised EU entities which issue financial instruments that reference a benchmark are required to comply with applicable obligations as set out under the BMR. The BMR was published on June 30, 2016 and the majority of the provisions became effective on January 1, 2018. The ManJer Issuers are
non-EU
entities and as a result, BMR application is very limited, although in some circumstances a few residual obligations could be deemed to be applicable because the ETCs are marketed across Europe.
 
 
Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (“PRIIPS”)
. PRIIPs became effective on January 1, 2018 and applies to investment product manufacturers and distributors. Under PRIIPs, manufacturers need to provide a key information document (KIDs) to investors. The intention of KIDs is to improve transparency for investors on the products and enhance investor protection. The product manufacturer is responsible for drafting the KID and for its content. All ETCs are currently subject to PRIIPs and KIDs have been produced since January 1, 2018.
 
 
MIFID II
. MIFID II covers a wide range of areas that affect the relevant issuer and distributor, such as product governance, a new definition of complex products (which captures all physical and synthetic ETCs) and the production of a new document called an EMT to facilitate the dissemination of relevant information to the markets and distributors in relation to each financial product.
 
 
Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012. (“SFTR”)
. Counterparties to securities financing transactions must report the transaction to trade repositories. The SFTR introduces a reporting requirement for transactions, and a disclosure requirement to investors with a requirement for prior consent. It also designates that financial instruments used for
re-hypothecation
are transferred to an account in the name of the other counterparty. Since the ManJer Issuers are based in
non-EU
jurisdictions, obligations are only indirectly applicable to them, but a certain level of interaction with EU counterparties is required to comply with some of these requirements.
 
Irish-Domiciled Issuer of our UCITS ETFs (Managed by WisdomTree Management Limited)
The investment management industry in Ireland is subject to both Irish domestic law and EU law. The Central Bank of Ireland, or the Central Bank, is responsible for the authorization and supervision of collective investment schemes, or CIS, in Ireland. CIS’s are also commonly known as funds/schemes. There are two main categories of funds authorized by the Central Bank, Undertakings for Collective Investment in Transferable Securities (UCITS) and funds that are not UCITS known as alternative investment funds. ETFs form part of the Irish and European regulatory frameworks that govern UCITS, with ETFs having been the subject of specific consideration at the European level which is then repeated and/or interpreted by the Central Bank in regulations and related guidance issued by the Central Bank.
One of our subsidiaries, WisdomTree Management Limited, is an Ireland based management company authorized in Ireland providing collective portfolio management services to WisdomTree Issuer PLC, or WTI, and WisdomTree UCITS ETFs. The WisdomTree UCITS ETFs are issued by WTI. WTI, a
non-consolidated
third party, is a public limited company organized in Ireland and is authorized as a UCITS by the Central Bank.
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All UCITS have their basis in EU legislation and once authorized in one EEA Member State, may be marketed throughout the EU, without further authorization. This is described as an EU passport. Post Brexit, the WisdomTree UCITS ETFs are expected to continue to be available to U.K. investors under the U.K. Financial Conduct Authority, or FCA, Temporary Permissions Regime.
WTI is established and operated as a public limited company with segregated liability between its
sub-funds.
The
sub-funds
are segregated portfolios, each with their own investment objective and policies and assets. Each
sub-fund
has a separate approval from the Central Bank, and each is authorized as an ETF. Each
sub-fund
tracks a different index. The index must comply with regulatory criteria that govern, among others, the eligibility and diversification of its constituents, and the availability of information on the index such as the frequency of calculation of the index, the index’s transparency, its methodology and frequency of calculation. Each
sub-fund
is listed on the Irish Stock Exchange and has shares admitted to trading on the London Stock Exchange and, typically, on various European stock exchanges and, accordingly, is subject to the listing requirements of those exchanges.
WTI is primarily subject to the following legislation and regulatory requirements:
 
European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (as amended) (“UCITS Regulations”).
The UCITS Regulations, which transpose Council Directive 2009/65/EC, Commission Directive 2010/43/EC and Commission Directive 2010/44/EC into Irish law, became effective on July 1, 2011. UCITS established in Ireland are authorized under the UCITS Regulations.
 
 
Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2019 (“Central Bank UCITS Regulations”).
The Central Bank UCITS Regulations were adopted in May 2019 and, together with the UCITS Regulations, any guidance produced by the Central Bank, and the Central Bank forms, form the basis for all the requirements that the Central Bank imposes on UCITS, UCITS management companies and depositaries of UCITS.
 
 
Central Bank Guidance.
The Central Bank also has produced guidance that provides direction on issues relating to the funds industry, certain of which set forth conditions not contained in the UCITS Regulations or the Central Bank Regulations with which UCITS must conform.
 
 
The Companies Acts 2014 (“Companies Act”).
WTI is incorporated as a public limited company under the Companies Act. Therefore, WTI is required to comply with various obligations under the Companies Act such as, but not limited to, convening general meetings and keeping proper books and records. The segregation of liability between
sub-funds
means there cannot be, as a matter of Irish law, cross-contamination of liability as between
sub-funds
so that the insolvency of one
sub-fund
affects another
sub-fund.
 
 
EMIR
. EMIR provides for OTC derivative contracts to be submitted to central clearing and imposes,
inter alia
, margin posting and other risk mitigation techniques, reporting and record keeping requirements. WTI uses OTC derivatives instruments to hedge the currency risk of some of its
sub-funds,
which are subject to EMIR. WTI has adhered to the 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by the International Swaps and Derivatives Association, Inc. The Central Bank has been designated as the competent authority for EMIR.
 
 
BMR
. The BMR is directly applicable law across the EU and applies to certain “administrators,” “contributors” and “users” of benchmarks with the aim of reducing the risk of benchmark manipulation and promoting confidence in their integrity and that of the financial markets which they support. Since WTI issues financial instruments that reference a benchmark, it will be required to comply with applicable obligations as set out under the BMR. In addition,
non-EU
administrators of benchmarks are required to satisfy a number of requirements to enable the benchmarks they provide to be used in the EU. To ensure investor protection, the BMR provides equivalence, recognition and endorsement
 
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  conditions under which third country benchmarks may be used by supervised entities in the EU. Since we control the provision of benchmarks, we are required to comply with applicable obligations within the timeframes set out under the BMR.
 
Irish-Domiciled Issuer (Managed by WisdomTree Multi Asset Management Limited)
One of our subsidiaries, WisdomTree Multi Asset Management Limited, is a Jersey based management company providing investment and other management services to WisdomTree Multi Asset Issuer PLC, or WMAI, in respect of the ETPs issued by WMAI. WMAI, a
non-consolidated
third party, is a public limited company incorporated in the laws of Ireland. It was established as a special purpose vehicle for the purposes of issuing collateralized exchange-traded securities, or ETP Securities, under the Collateralized ETP Securities Programme described in its Base Prospectus. WMAI is a ‘
qualifying company
’ within the meaning of section 110 of the Taxes Consolidation Act 1997 (as amended), of Ireland. WMAI is not authorized or regulated by the Central Bank by virtue of issuing ETPs.
The Central Bank, as competent authority under the Prospectus Regulation, has approved the Base Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Regulation. Such approval relates only to ETP Securities which are to be admitted to trading on a regulated market for the purpose of MiFID II and/or which are to be offered to the public in any EEA Member State. We are in discussions with the FCA in respect of the ETPs issued by WMAI such that, if necessary, the Base Prospectus for those products could be approved by the FCA in addition to the existing Central Bank approval to ensure continuous offering in the U.K. following the expiry of the current transitional arrangements.
The Central Bank has, at the request of WMAI, notified the approval of the Base Prospectus in accordance with the Prospectus Regulation to the UKLA (the United Kingdom financial supervisory authority), the Commissione Nazionale per la Societá e la Borsa (the Italian financial supervisory authority), the Bundesanstalt für Finanzdienstleistungsaufsicht (the German Federal financial supervisory authority) and the Financial Market Authority of Austria, by providing them,
inter alia
, with certificates of approval attesting that the Base Prospectus has been prepared in accordance with the Prospectus Regulation. WMAI may request the Central Bank to provide competent authorities in other EEA Member States with such certificates whether for the purposes of making a public offer in such Member States or for admission to trading of all or any ETP Securities on a regulated market therein or both.
WMAI is primarily subject to the following legislation and regulatory requirements:
 
The Companies Act
. WMAI is incorporated as a public limited liability company under the Companies Act. Therefore, WMAI is required to comply with various obligations under the Companies Act such as, but not limited to, convening general meetings, keeping proper books and records and filing financial statements.
 
 
The Prospectus Regulation
. The Base Prospectus has been drafted, and any offer of ETP Securities in any EEA Member State that has implemented the Prospectus Regulation is made in compliance with the Prospectus Regulation and any relevant implementing measure in such Member States.
 
 
EMIR
. WMAI hedges its payment obligations in respect of the ETP Securities by entering into swap transactions with swap providers, which are subject to EMIR. The Central Bank has been designated as the competent authority for EMIR and, to assess compliance with EMIR, requests that WMAI submits annually an EMIR Regulatory Return.
 
 
BMR
. Since WMAI issues financial instruments that reference a benchmark, it also will be required to comply with applicable obligations under the BMR.
 
 
MAD
. MAD has a direct effect in Ireland and strengthens the legal framework underpinning the function of detecting, sanctioning and deterring market abuse. Broadly, MAD applies to any financial
 
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  instrument admitted to, or for which a request for admission has been made to, trading on a regulated market in at least one member state of the EU or in an EEA Member State. Obligations imposed on WMAI under MAD include the requirement to publish inside information in a public and timely manner, to draw up and maintain a list of insiders and to refrain from market manipulation.
 
 
Intellectual Property
We regard our name, WisdomTree, as material to our business and have registered WisdomTree as a service mark with the U.S. Patent and Trademark Office and in various foreign jurisdictions. We also have registered Modern Alpha as a service mark with the U.S. Patent and Trademark Office and in various foreign jurisdictions.
Our index-based equity ETFs are based on our own indexes and we do not license them from, nor do we pay licensing fees to, third parties for these indexes. We do, however, license third-party indexes for certain of our fixed income, currency and alternative ETFs.
On March 6, 2012, the U.S. Patent and Trademark Office issued to us our patent on Financial Instrument Selection and Weighting System and Method, which is embodied in our dividend weighted equity indexes. We also have one patent application pending with the U.S. Patent and Trademark office that relates to the operation of our ETFs and our index methodology. There is no assurance that a patent will be issued from this application and we currently do not rely upon our recently issued or future patents for a competitive advantage.
Employees
As of December 31, 2019, we had 208 full-time employees, of which 137 were in our U.S. Business segment and 71 were in our International Business segment. None of our employees are covered by a collective bargaining agreement and we consider our relations with employees to be good.
Available Information
Company Website and Public Filings
Our website is located at
www.wisdomtree.com
, and our investor relations website is located at
http://ir.wisdomtree.com
. We make available, free of charge through our investor relations website, our Annual Reports on Form
 10-K,
Quarterly Reports on Form
 10-Q
and Current Reports on Form
 8-K,
and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding the Company at
www.sec.gov
.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases as part of our investor relations website. Further corporate governance information, including board committee charters and code of conduct, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not incorporated by reference into this Annual Report on Form
10-K
or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
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ITEM 1A.
RISK FACTORS
 
 
Any investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this Report before making a decision to invest in our common stock. If any of these risks actually occur, our business, operating results, financial condition and prospects could be harmed. This could cause the trading price of our common stock to decline and a loss of all or part of your investment. Certain statements below are forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Market Risks
Declining prices of securities, gold and other precious metals and other commodities can adversely affect our business by reducing the market value of the assets we manage or causing WisdomTree ETP investors to sell their fund shares and trigger redemptions.
We are subject to risks arising from declining prices of securities, gold and other precious metals and other commodities, which may result in a decrease in demand for investment products, a higher redemption rate and/or a decline in AUM. The financial markets are highly volatile and prices for financial assets may increase or decrease for many reasons, including general economic conditions, trade uncertainties, rising or falling interest rates, the strengthening or weakening of the U.S. dollar, political events, acts of terrorism and other matters beyond our control. Substantially all our revenues are derived from advisory fees earned on our AUM, in both the international and U.S. markets. As a result, our business can be expected to generate lower revenues in declining market environments or general economic downturns. Such adverse conditions would likely cause the value of our AUM to decrease, which would result in lower advisory fees, or cause investors in the WisdomTree ETPs to sell their shares in favor of investments they perceive to offer greater opportunity or lower risk, thus triggering redemptions that would also result in decreased AUM and lower fees.
Fluctuations in the amount and mix of our AUM may negatively impact revenues and operating margins.
The level of our revenues depends on the amount and mix of our AUM. Our revenues are derived primarily from advisory fees based on a percentage of the value of our AUM and vary with the nature of the ETPs, which have different fee levels. Fluctuations in the amount and mix of our AUM may be attributable in part to market conditions outside of our control that have had, and in the future could have, a negative impact on our revenues and operating margins.
Abnormally wide bid/ask spreads and market disruptions that halt or disrupt trading or create extreme volatility could undermine investor confidence in the ETP investment structure and limit investor acceptance of ETPs.
ETPs trade on exchanges in market transactions that generally approximate the value of the referenced assets or underlying portfolio of securities held by the particular ETP. Trading involves risks including the potential lack of an active market for fund shares, abnormally wide bid/ask spreads (the difference between the prices at which shares of an ETP can be bought and sold) that can exist for a variety of reasons and losses from trading. These risks can be exacerbated during periods when there is low demand for an ETP, when the markets in the underlying investments are closed, when markets conditions are extremely volatile or when trading is disrupted. This could result in limited growth or a reduction in the overall ETP market and result in our revenues not growing as rapidly as it has in the recent past or even in a reduction of revenues.
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Concentration Risks
We derive a substantial portion of our revenues from a limited number of products and, as a result, our operating results are particularly exposed to investor sentiment toward investing in the products’ strategies and our ability to maintain the AUM of these products, as well as the performance of these products.
At December 31, 2019, approximately 54% of our global AUM was concentrated in ten of our WisdomTree ETPs with approximately 22% in three of our gold products, 19% in four of our domestic equity ETFs, 10% in HEDJ and DXJ and 3% in one of our emerging markets ETFs. As a result, our operating results are particularly exposed to the performance of these funds and our ability to maintain the AUM of these funds, as well as investor sentiment toward investing in the funds’ strategies. If the AUM in these funds were to decline, either because of declining market values or net outflows from these funds, our revenues would be adversely affected.
Declining commodity prices, and gold prices in particular, including as a result of changes in demand for commodities and gold as an investment, could materially and adversely affect our business.
At December 31, 2019, approximately 23% of our global AUM were in ETPs backed by gold and approximately 9% were in ETPs backed by other commodities. Precious metals such as gold are often viewed as “safe haven” assets as they tend to attract demand during periods of economic and geopolitical uncertainty. Accommodative monetary policies are also favorable as the opportunity cost of forgoing investment in interest-bearing assets is low. Market conditions that are not conducive to investment in precious metals may lead to declining prices that are linked to our ETPs and thereby adversely affect our AUM and revenues. We can also provide no assurance our products backed by precious metals will benefit from favorable market conditions. In addition, changes in long-term demand cycles for commodities generally and cyclicality in demand for commodities as an investment asset, could reduce demand for certain of our products, limit our ability to successfully launch new products and also may lead to redemptions by existing investors.
Also, a portion of the advisory fee revenues we receive on our ETPs backed by gold are paid in gold ounces. In addition, we pay gold ounces to satisfy our deferred consideration obligation that we assumed in connection with the ETFS Acquisition (See Note 12 to our Consolidated Financial Statements). While we may readily sell the gold that we earn under these advisory contracts, we still may maintain a position. We currently do not enter into arrangements to hedge against fluctuations in the price of gold and any hedging we may undertake in the future may not be cost-effective or sufficient to hedge against this gold exposure.
A significant portion of our AUM is held in products with exposure to U.S. and international developed markets, and we therefore have exposure to domestic and foreign market conditions and are subject to currency exchange rate risks.
At December 31, 2019, approximately 28% and 22% of our AUM was held in products with exposure to the U.S. and international developed markets, respectively. Therefore, the success of our business is closely tied to various conditions in these markets which may be affected by domestic and foreign political, social and economic uncertainties, monetary policies conducted in these regions and other factors.
In addition, fluctuations in foreign currency exchange rates could reduce the revenues we earn from certain foreign invested products. This occurs because an increase in the value of the U.S. dollar relative to
non-U.S.
currencies may result in a decrease in the dollar value of the AUM in these products, which, in turn, would result in lower revenues. Furthermore, investors may perceive certain foreign invested products, as well as certain of our currency and fixed income products to be a less attractive investment opportunity when the value of the U.S. dollar rises relative to
non-U.S.
currencies, which could have the effect of reducing investments in these products, thus reducing revenues. Our products exposed to the U.S. market may benefit from a rising U.S. dollar, but we can provide no assurance that this will be the case. Also, a weakening U.S. dollar relative to the euro or yen, may make less attractive our international hedged equity products, as unhedged alternatives would benefit from the appreciation of the foreign currency or currencies while our products would not, which could result in redemptions in our funds.
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Withdrawals or broad changes in investments in our ETPs by investors with significant positions may negatively impact revenues and operating margins.
We have had in the past, and may have in the future, investors who maintain significant positions in one or more of our ETPs. If such an investor were to broadly change or withdraw its investments in our ETPs because of a change to its investment strategy, market conditions or any other reason, it may significantly change the amount and mix of our AUM, which may negatively affect our revenues and operating margins.
Competition and Distribution Risks
The asset management business is intensely competitive, and we may experience pressures on our pricing and market share which could reduce revenues and profit margins.
Our business operates in a highly competitive industry. We compete directly with other ETP sponsors and mutual fund companies and indirectly against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions that offer products that have similar features and investment objectives to those offered by us. This includes fundamentally weighted or factor-based indexes or currency hedged products with fees that are generally equivalent to, and in some instances lower than, our products. We compete based on a number of factors, including name recognition, service, investment performance, product features, breadth of product choices and fees.
In addition, in September 2019, the SEC approved the ETF Rule, which removes the need to file for exemptive relief in order to issue ETFs thereby creating fewer barriers to entry for competitors. We expect that additional companies, both new and traditional asset managers, will continue to enter the ETP space.
Also, during 2019, the SEC approved multiple proposals for
non-transparent
active ETFs which are products that are not required to disclose their holdings daily, as most ETFs currently are required to do. The launch of such products may allow traditional actively managed mutual fund sponsors to compete more effectively against ETFs.
Several ETP sponsors with whom we directly compete continue to migrate toward offering low and no fee products targeting gains in market share. Price competition exists in not only commoditized product categories such as traditional, market capitalization weighted index exposures, but also in fundamental or other
non-market
capitalization weighted or factor-based exposures. Certain larger competitors are able to offer products at lower price points or otherwise as loss leaders due to other revenue sources available within such competitor that are unavailable to us. Funds are being offered with fees of 20 bps or less, which have attracted approximately 76% of the net flows globally during the last three years. Fee reduction by certain of our competitors has been a trend over the last few years and continues to persist and many of our competitors are well positioned to benefit from this trend.
Our competition may have greater market share, offer a broader range of products and have greater financial resources than we do. Some financial institutions operate in a more favorable regulatory environment and/or have proprietary products, sources of revenue and distribution channels, which may provide them and their investment products with certain competitive advantages, including in pricing ETFs as loss leaders. Further consolidation within the industry may also put us at a competitive disadvantage.
We believe that due to the continuing evolution of the competitive landscape described above, we may experience pressures on our pricing and market share which could reduce our revenues and profit margins.
We rely on third-party distribution channels to sell our products and increased competition, a failure to maintain business relationships and other factors could adversely impact our business
.
We rely on various third-party distribution channels, including registered investment advisors, wirehouse and institutional channels to sell our products. Increasing competition, a failure to maintain business relationships
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and other factors could impair our distribution capabilities and increase the cost of conducting business. In addition, several of the largest custodial platforms and online brokerage firms recently announced their decision to eliminate trading commissions for ETFs. Our arrangements with these platforms had offered us preferred or exclusive access for our products, enabling investors to purchase ETFs without paying commissions. Exclusivity is no longer available, and we can provide no assurance that access to new opportunities will arise. Any inability to access and successfully sell our products through our distribution channels could have a negative effect on our AUM levels and adversely impact our business.
Performance and Investment Risks
Many of our WisdomTree ETPs have a limited track record and poor investment performance could cause our revenues to decline.
Many of our ETPs have a limited track record upon which an evaluation of their investment performance can be made. Certain investors limit their investments to ETPs with track records of ten years or more. Furthermore, as part of our strategy, we continuously evaluate our product offerings to ensure that all our funds are useful, compelling and differentiated investment offerings, to more competitively align our overall product line in the current ETP landscape and to reallocate our resources to areas of greater client interest. As a result, we may further adjust our product offerings, which may result in the closing of some of our ETPs, changing their investment objective or offering of new funds. The investment performance of our funds is important to our success. While strong investment performance could stimulate sales of our ETPs, poor investment performance, on an absolute basis or as compared to third-party benchmarks or competitive products, could lead to a decrease in sales or stimulate redemptions, thereby lowering the AUM and reducing our revenues. Our fundamentally-weighted equity products are designed to provide the potential for better risk-adjusted investment returns over full market cycles and are best suited for investors with a longer-term investment horizon. However, the investment approach of our equity products may not perform well during certain shorter periods of time during different points in the economic cycle.
Operational Risks
Over the last few years, we have expanded our business internationally. This expansion subjects us to increased operational, regulatory, financial and other risks.
We face increased operational, regulatory, financial, compliance, reputational and foreign exchange rate risks as a result of our international expansion. The failure of our compliance and internal control systems to properly mitigate such additional risks, or of our operating infrastructure to support such expansion, could result in operational failures and regulatory fines or sanctions. If our international products and operations experience any negative consequences or are perceived negatively in
non-U.S.
markets, it may also harm our reputation in other markets, including the U.S. market.
We have and may continue to pursue acquisitions or other strategic transactions. Any strategic transactions that we are a party to will result in increased demands on our management and other resources, may be significant in size relative to our assets and operations, result in significant changes in our business and materially and adversely affect our stock price. If we were unable to manage our strategic initiatives it could have a material adverse effect on our business.
We have and may continue to pursue acquisitions or strategic transactions. These initiatives have placed increased demands on our management and other resources and may continue to do so in the future. We may not be able to manage our operations effectively or achieve our desired objectives on a timely or profitable basis. To do so may require, among other things:
  continuing to retain, motivate and manage our existing employees and/or attract and integrate new employees;
 
 
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  developing, implementing and improving our operational, financial, accounting, reporting and other internal systems and controls on a timely basis; and
 
  maintaining and developing our various support functions including human resources, information technology, legal and corporate communications.
 
If we are unable to manage these initiatives effectively, there could be a material adverse effect on our ability to maintain or increase revenues and profitability.
Managing strategic initiatives may require continued investment in personnel, information technology infrastructure and marketing activities, as well as further development and implementation of financial, operational and compliance systems and controls. We may not be successful in implementing all of the processes that are necessary. Unless such initiatives result in an increase in our revenues that is at least proportionate to the increase in the costs associated with implementing them, our future profitability will be adversely affected.
In addition, any future strategic transactions may result in the issuance of a significant amount of our common stock or other securities that could be dilutive to our stockholders, make substantial borrowings and/or changes in our board composition and/or management team, that constitute a change of control of our Company, lead to significant changes in our product offering, business operations and earning and risk profiles, and/or result in a decline in the price of our common stock.
Our ability to complete future strategic transactions depends upon a number of factors that are not entirely within our control, including our ability to identify suitable merger or acquisition candidates, negotiate acceptable terms, conclude satisfactory agreements and secure financing. Our failure to complete strategic transactions or to integrate and manage acquired or combined businesses successfully could materially and adversely affect our business, results of operations and financial conditions.
The uncertainty regarding the U.K.’s exit from the EU could adversely affect our business.
The U.K. left the EU on January 31, 2020, referred to as Brexit, subject to transitional arrangements which will govern the relationship between the U.K. and the remaining member states until the end of 2020. Such an exit from the EU is unprecedented, and it is currently unclear what the U.K.’s trading relationship with the EU will be after the expiry of the transitional arrangements. Notwithstanding the uncertainty around the precise structure of the future EU/U.K. relationship, it can be assumed that there will be changes to current U.K. trading relationships and the U.K. legal and regulatory environment. These changes may impact how we conduct our business across Europe. This uncertainty also could impact the broader global economy, including by reducing investor confidence and driving volatility. Such uncertainty could lead to scenarios that adversely affect our business, including our revenues, from either a decrease in the value of our AUM or from outflows from our funds due to a perceived higher exposure of our company to Brexit risk.
Catastrophic and unpredictable events could have a material adverse effect on our business.
A terrorist attack, war, power failure, cyber-attack, natural disaster, pandemic event or other catastrophic or unpredictable event could adversely affect our revenues, expenses and operating results by: interrupting our normal business operations; inflicting employee casualties, including loss of our key employees; requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and reducing investor confidence. We have a disaster recovery plan to address certain contingencies, but this plan may not be sufficient in responding or ameliorating the effects of all disaster scenarios. Similarly, these types of events could also affect the ability of the third-party vendors that we rely upon to conduct our business, including parties that provide us with
sub-advisory
portfolio management services, custodial, fund accounting and administration services or index calculation services, to continue to provide these necessary services to us, even though they may also have disaster recovery plans to address these contingencies. In addition, a failure of the stock exchanges
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on which our products trade to function properly could cause a material disruption to our business. If we or our third-party vendors are unable to respond adequately or in a timely manner, these failures may result in a loss of revenues and/or increased expenses, either of which would have a material adverse effect on our operating results.
Third Party Risks
We currently depend on State Street Bank and Trust Company to provide us with critical administrative services to operate our business and the WisdomTree ETFs. The failure of State Street to adequately provide such services could materially affect our operating business and harm WisdomTree ETF shareholders.
We currently depend upon State Street Bank and Trust Company, or State Street, to provide the WisdomTree Trust with custody services, fund accounting, administration, transfer agency and securities lending services. The failure of State Street to successfully provide us and the WisdomTree ETFs with these services could result in financial loss to us and WisdomTree ETF shareholders. In addition, because State Street provides a multitude of important services to us, changing this vendor relationship would be challenging. It might require us to devote a significant portion of management’s time to negotiate a similar relationship with another vendor or have these services provided by multiple vendors, which would require us to coordinate the transfer of these functions to another vendor or vendors.
We currently primarily depend on BNY Mellon and Voya Investment Management to provide portfolio management services and other third parties to provide many critical services to operate our business and the WisdomTree ETFs. The failure of key vendors to adequately provide such services could materially affect our operating business and harm WisdomTree ETF shareholders.
We depend on third-party vendors to provide us with many services that are critical to operating our business, including BNY Mellon and Voya Investment Management as
sub-advisers
that provide us with portfolio management services, third-party providers of index calculation services for our indexes, a distributor of the WisdomTree ETFs and a third-party provider of indicative values of the portfolios of the WisdomTree ETFs. The failure of any of these key vendors to provide us and the WisdomTree ETFs with these services could lead to operational issues and result in financial loss to us and WisdomTree ETF shareholders.
We currently depend on R&H Fund Services (Jersey) Limited in respect of the products issued by the ManJer Issuers, APEX IFS Limited in respect of the products issued by WMAI and State Street Fund Services (Ireland) Limited in respect of the WisdomTree UCITS ETFs to provide us with critical administrative services to those products. The failure of any of those providers to adequately provide such services could materially affect our operating business and harm investors in those products.
We currently depend upon R&H Fund Services (Jersey) Limited in respect of the products issued by the ManJer Issuers, APEX IFS Limited in respect of the products issued by WMAI and State Street Fund Services (Ireland) Limited in respect of the WisdomTree UCITS ETFs, to provide fund accounting, administration and, transfer agency services, as well as custody services in the case of the WisdomTree UCITS ETFs. The failure of any service provider to successfully provide these services could result in financial loss to the products, us and investors in those products. In addition, because each of the service providers provides a multitude of important services, changing these vendor relationships would be challenging. It might require us to devote a significant portion of management’s time to negotiate a similar relationship with other vendors or have these services provided by multiple vendors, which would require us to coordinate the transfer of these functions to another vendor or vendors.
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The WisdomTree UCITS ETFs primarily depend on either of Assenagon Asset Management S.A. or Irish Life Investment Managers Limited to provide portfolio management services and other third parties to provide many critical services to operate the WisdomTree UCITS ETFs. The failure of key vendors to adequately provide such services could materially affect our operating business and harm WisdomTree UCITS ETFs’ shareholders.
The WisdomTree UCITS ETFs depend on third-party vendors to provide many services that are critical to operating our business, including Assenagon Asset Management S.A. and Irish Life Investment Managers Limited as investment managers that provide us with portfolio management services and third-party providers of index calculation services. The failure of any of these key vendors to provide the WisdomTree UCITS ETFs with these services could lead to operational issues and result in financial loss to us and shareholders of WisdomTree UCITS ETFs.
The products issued by our European business are subject to counterparty risks. Any actual or perceived weakness of those counterparties could negatively impact the European business’ AUM and therefore the Company’s AUM, the relevant product and secondary pricing of the products on exchange, which could materially adversely affect our business.
The products issued by our European business depend on the services of counterparties, custodians and other agents and are thus subject to a variety of counterparty risks, including the following:
  Products issued by the ManJer Issuers are backed by physical metal and are subject to risks associated with the custody of metal, including the risk that access to the physically backed metal held in the vaults or secure warehouses of a custodian or
sub-custodian
could be restricted by natural events, such as an earthquake, or human actions, such as a terrorist attack, the risk that such physically backed metal in its custody could be lost, stolen or damaged, and the risk that our recovery of any losses from a custodian,
sub-custodian
or insurer may be inadequate.
 
  Products issued by WMAI, certain WisdomTree UCITS ETFs and certain products issued by the ManJer Issuers are backed by swap, derivative or similar arrangements are subject to risks associated with the creditworthiness of their counterparties, including the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the relevant arrangement (whether or not bona fide) or because of a credit, liquidity, regulatory, tax or operational problem. Any deterioration of the credit or downgrade in the credit rating of a counterparty, or the custodian holding the collateral, could cause the associated products to trade at a discount to the value of the underlying assets.
 
Not all of our arrangements with counterparties of our products issued by the ManJer Issuers are collateralized. Products issued by WisdomTree Oil Securities Limited, or OSL, are backed by futures swaps purchased from an affiliate of the Royal Dutch Shell Company, or Shell. In the event of default under these purchased swaps, OSL would have only unsecured claims against Shell with no recourse to collateral.
The terms of contracts with counterparties are generally complex, often customized and often not subject to regulatory oversight. A voluntary or involuntary default by a counterparty may occur at any time without notice. In the event of any default by, or the insolvency of, any counterparty, the relevant products may be exposed to the under-segregation of assets, fraud or other factors that may result in the recovery of less than all of the property of our issuers that was held in custody or safekeeping in the case of physically backed products or the recovery of property that is insufficient in value to cover all amounts payable to holders of the applicable products upon their redemption. The impact of market stress or counterparty financial condition may not be accurately foreseen or evaluated and, as a result, we may not take sufficient action to reduce counterparty risks effectively. Any losses due to a counterparty’s failure to perform its contractual obligations will be borne by the relevant product issuer and there could be a substantial delay in recovering assets due from counterparties or it may not be possible to do so at all. Defaults by, or even rumors or questions about, the solvency of counterparties
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may increase operational risks or transaction costs, which may negatively affect the investment performance of the relevant products and have a material adverse effect on our business and operations.
Any products that have the benefit of collateral are subject to counterparty risk associated with the quality and the extent of the collateral received
.
Products backed by swap, derivative or similar arrangements are also subject to risks associated with the quality of the collateral that our issuers receive, if any, under credit support arrangements, repurchase transactions or other similar arrangements. For example, collateral received by an issuer may not be of sufficient value to cover all amounts payable to holders of the relevant products upon their redemption for a variety of reasons, including that the enforcement of the right to the collateral may have resulted from its counterparty failing to post collateral with sufficient value to cover any exposure under corresponding swaps, that the market value of such collateral had subsequently declined or that such exposure had increased due to market conditions. In addition, collateral is generally posted with reference to the value of outstanding exposure as at the previous day’s close, therefore presenting a risk that subsequent market movements in the prices of the underlying swaps may render the previously posted collateral inadequate. Although the substantial majority of our contracts are over-collateralized, there can be no assurance that the prescribed collateral levels will be sufficient to address these risks.
Our risk management policies and procedures, and those of our third-party vendors upon which we rely, may not be fully effective in identifying or mitigating risk exposure, including employee misconduct. If our policies and procedures do not adequately protect us from exposure to these risks, we may incur losses that would adversely affect our financial condition, reputation and market share.
We have developed risk management policies and procedures and we continue to refine them as we conduct our business. Many of our procedures involve oversight of third-party vendors that provide us with critical services such as portfolio management, custody and fund accounting and administration, and index calculation services. Our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure. Moreover, we are subject to the risks of errors and misconduct by our employees, including fraud and
non-compliance
with policies. These risks are difficult to detect in advance and deter, and could harm our business, results of operations or financial condition. Although we maintain insurance and use other traditional risk-shifting tools, such as third-party indemnification, to manage certain exposures, they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency. If our policies and procedures do not adequately protect us from exposure and our exposure is not adequately covered by insurance or other risk-shifting tools, we may incur losses that would adversely affect our financial condition and could cause a reduction in our revenues as investors in WisdomTree ETPs shift their investments to the products of our competitors.
Technology Risks
Any significant limitation or failure of our technology systems, or of our third-party vendors’ technology systems, or any security breach of our information and cyber security infrastructure, software applications, technology or other systems that are critical to our operations could interrupt or damage our operations and result in material financial loss, regulatory violations, reputational harm or legal liability.
We are dependent upon the effectiveness of our own, and our vendors’, information security policies, procedures and capabilities to protect the technology systems used to operate our business and to protect the data that reside on or are transmitted through them. Although we and our third-party vendors take protective measures to secure information, our and our vendors’ technology systems may still be vulnerable to unauthorized access, computer viruses or other events that could result in inaccuracies in our information or system disruptions or failures, which could materially interrupt or damage our operations. In addition, technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced technology platforms
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for their products, which could affect our business. Any inaccuracies, delays, system failures or breaches, or advancements in technology, and the cost necessary to address them, could subject us to client dissatisfaction and losses or result in material financial loss, regulatory violations, reputational harm or legal liability, which, in turn, could cause a decline in our earnings or stock price.
Human Capital Risks
Our ability to operate effectively could be impaired if we fail to retain or recruit key personnel.
The success of our business is highly dependent on our ability to attract, retain and motivate highly skilled, and sometimes highly specialized, employees, including in particular, operations, product development, research and sales personnel. Our U.S. employees generally may voluntarily terminate their employment at any time. The market for these individuals is extremely competitive and is likely to become more so as additional investment management firms enter the ETF industry. Our compensation methods may not enable us to recruit and retain required personnel. For example, price volatility in our common stock may impact our ability to effectively use equity grants as an employee compensation incentive. Also, we may need to increase compensation levels, which would decrease our net income or increase our losses. If we are unable to retain and attract key personnel, it could have an adverse effect on our business, our results of operations and financial condition.
Expense and Cash Management Risks
Our expenses are subject to fluctuations that could materially affect our operating results.
Our results of operations are dependent in part on the level of our expenses, which can vary from quarter to quarter. Our expenses may fluctuate primarily as a result of discretionary spending, including additional headcount, accruals for incentive compensation, marketing, advertising, sales and other expenses we incur in connection with our
day-to-day
operations. Accordingly, our results of operations may vary from quarter to quarter.
Our indebtedness may expose us to material risks, which may impede our ability to refinance our debt upon maturity, increase our cost of borrowing or result in our debt being called prior to maturity.
We are party to a credit agreement with Credit Suisse AG and certain other lenders, whereby the lenders extended to us a term loan, or the Term Loan, of which $179.0 million is currently outstanding and a $50.0 million revolving credit facility, or the Revolver and, together with the Term Loan, the Credit Facility. The borrowings under the Credit Facility are at a floating rate and mature on April 11, 2021. There are currently no amounts outstanding under the Revolver. Our indebtedness may make it more difficult for us to withstand or respond to adverse or changing business, regulatory and economic conditions or to take advantage of new business opportunities or make necessary capital expenditures. In addition, our credit agreement contains various covenants, that may limit our business activities, including restrictions on our ability to incur additional indebtedness, pay dividends and make stock repurchases. For example, the credit agreement includes a financial covenant requiring us not to exceed the Total Leverage Ratio. The failure to comply with the Total Leverage Ratio or other restrictions could result in an event of default, giving our lenders the ability to accelerate repayment of our obligations (See Note 13 to our Consolidated Financial Statements). To the extent we further service our debt from our cash flow, such cash will not be available for our operations or other purposes. Any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations. Our ability to repay outstanding amounts under our Credit Facility, to refinance our debt or to obtain additional financing through debt or the sale of equity securities will depend on our performance, as well as financial, business and other general economic factors affecting the credit and equity markets generally or our business in particular, many of which are beyond our control. Any such alternatives may not be available to us on satisfactory terms or at all.
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Legal and Regulatory Risks
Compliance with extensive, complex and changing regulation imposes significant financial and strategic costs on our business, and
non-compliance
could result in fines and penalties.
Our business is subject to extensive regulation of our business and operations. One of our U.S. subsidiaries, WTAM, is a registered investment adviser and is subject to oversight by the SEC pursuant to its regulatory authority under the Investment Advisers Act. We also must comply with certain requirements under the Investment Company Act, with respect to the WisdomTree ETFs for which WTAM acts as investment adviser. WTAM is also a member of the NFA and registered as a commodity pool operator for certain of our ETFs. One of our other subsidiaries, WisdomTree Commodity Services, LLC, is also a member of the NFA and registered as a commodity pool operator for a commodity ETF that is not registered under the Investment Company Act. As a commodity pool operator, we are subject to oversight by the NFA and the CFTC pursuant to regulatory authority under the Commodity Exchange Act. In addition, the content and use of our marketing and sales materials and of our sales force in the U.S. regarding our U.S. listed ETFs is subject to the regulatory authority of FINRA. We are also subject to foreign laws and regulatory authorities with respect to operational aspects of our products that invest in securities of issuers in foreign countries, in the marketing, offer and/or sales of our products in foreign jurisdictions and in our offering of investment products domiciled outside of the U.S., such as our ETPs issued by the ManJer Issuers, UCITS ETFs and ETPs issued by WMAI. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of our business, including the authority to grant, and, in specific circumstances to cancel, permissions to carry on particular businesses. Our or our ETPs’ failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us, our personnel or our ETPs is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us or our ETPs by regulators could harm our reputation and thus result in redemptions from our products and impede our ability to retain and attract investors in WisdomTree ETPs, all of which may reduce our revenues.
We face the risk of significant intervention by regulatory authorities, including extended investigation activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of our business activities. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect investors in WisdomTree ETPs and our advisory clients and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities, including through WisdomTree ETP investor protection and market conduct requirements.
The regulatory environment in which we operate also is subject to modifications and further regulation. Concerns have been raised at various times about ETFs’ possible contribution to market volatility as well as the disclosure requirements applicable to certain types of more complex ETFs. In addition, the SEC approved a broad set of reforms regarding data reporting and fund liquidity, which are imposing additional expense and require additional administrative services and requirements, among other matters, in seeking to comply with the new rules. The SEC also proposed a broad set of reforms regarding derivatives usage that would apply to all registered funds, including ETFs, which would impose additional expense and require additional administrative services and requirements, among other matters. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us or investors in our products also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes. Compliance with new laws and regulations may result in increased compliance costs and expenses.
Specific regulatory changes also may have a direct impact on our revenues. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry. New regulation, revised regulatory or judicial interpretations, revised viewpoints, outcomes of lawsuits against other fund complexes or growth in our ETP assets and/or profitability related to the annual approval process for investment advisory agreements may result in the reduction of fees under these
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agreements, which would mean a reduction in our revenues or otherwise may lead to an increase in costs or expenses.
Our operations outside the U.S. are subject to the laws and regulations of various
non-U.S.
jurisdictions and
non-U.S.
regulatory agencies and bodies. As we have expanded our international presence, a number of our subsidiaries and international operations have become subject to regulatory systems, in various jurisdictions, comparable to those covering our operations in the U.S. Regulators in these
non-U.S.
jurisdictions may have broad authority with respect to the regulation of financial services including, among other things, the authority to grant or cancel required licenses or registrations.
From time to time, we may be involved in legal proceedings that could require significant management time and attention, possibly resulting in significant expense or in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
From time to time, we may be subject to litigation. In any litigation in which we are involved, we may be forced to incur costs and expenses to defend ourselves or to pay a settlement or judgment or comply with any injunctions in connection therewith if there is an unfavorable outcome. The expense of defending litigation may be significant. The amount of time to resolve lawsuits is unpredictable and defending ourselves may divert management’s attention from the
day-to-day
operations of our business, which could adversely affect our business, results of operations, financial condition and cash flows. In addition, an unfavorable outcome in any such litigation could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may from time to time be subject to claims of infringement of third-party intellectual property rights, which could harm our business.
Third parties may assert against us alleged patent, copyright, trademark or other intellectual property rights to intellectual property that is important to our business. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may divert the efforts and attention of our management from our business. As a result of such intellectual property infringement claims, we could be required or otherwise decide that it is appropriate to:
  pay third-party infringement claims;
 
  discontinue selling the particular funds subject to infringement claims;
 
  discontinue using the processes subject to infringement claims;
 
  develop other intellectual property or products not subject to infringement claims, which could be time-consuming and costly or may not be possible; or
 
  license the intellectual property from the third party claiming infringement, which license may not be available on commercially reasonable terms.
 
The occurrence of any of the foregoing could result in unexpected expenses, reduce our revenues and adversely affect our business and financial results.
We have been issued a patent and have applied for another patent, but this additional patent may not be issued to us and we may not be able to enforce or protect our patents and other intellectual property rights, which may harm our ability to compete and harm our business.
Although we have a patent and have applied for another patent relating to our index methodology and the operation of our ETFs, this additional patent may not be issued to us. In addition, even if issued, our ability to
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enforce our patents and other intellectual property rights is subject to general litigation risks. While we have been competing without the benefit of this patent being issued, if it is not issued or we cannot successfully enforce it and our currently issued patent, we may lose the benefit of a future competitive advantage that they would otherwise provide to us. If we seek to enforce our rights, we could be subject to claims that the intellectual property right is invalid or is otherwise not enforceable. Furthermore, our assertion of intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own or assert other claims against us, which could harm our business. If we are not ultimately successful in defending ourselves against these claims in litigation, we may be subject to the risks described in the immediately preceding risk factor entitled “We may from time to time be subject to claims of infringement of third-party intellectual property rights, which could harm our business.”
Other Company Risks
A change of control of our company would automatically terminate our investment management agreements relating to the WisdomTree U.S. listed ETFs unless the Board of Trustees of the WisdomTree Trust and shareholders of the WisdomTree U.S. listed ETFs voted to continue the agreements. A change in control could occur if a third party were to acquire a controlling interest in our Company.
Under the Investment Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board must vote to continue such an agreement following any such assignment and the shareholders of the WisdomTree U.S. listed ETFs must approve the assignment. The cost of obtaining such shareholder approval can be significant and ordinarily would be borne by us. Similarly, under the Investment Advisers Act, a client’s investment management agreement may not be “assigned” by the investment adviser without the client’s consent.
An investment management agreement is considered under both acts to be assigned to another party when a controlling block of the adviser’s securities is transferred. Under both acts, there is a presumption that a stockholder beneficially owning 25% or more of an adviser’s voting stock controls the adviser and conversely a stockholder beneficially owning less than 25% is presumed not to control the adviser. In our case, an assignment of our investment management agreements may occur if a third party were to acquire a controlling interest in our Company. We cannot be certain that the Trustees of the WisdomTree U.S. listed ETFs would consent to assignments of our investment management agreements or approve new agreements with us if a change of control occurs. And even if such approval were obtained, approval from the shareholders of the WisdomTree U.S. listed ETFs would be required to be obtained; such approval could not be guaranteed and even if obtained, likely would result in significant expense. This restriction may discourage potential purchasers from acquiring a controlling interest in our Company.
Our revenues could be adversely affected if the WisdomTree Trust determines that the advisory fees we receive from the WisdomTree ETFs should be reduced.
Our advisory agreements with the WisdomTree Trust and the fees we collect from the WisdomTree ETFs are subject to review and approval by the Independent Trustees of the WisdomTree Trust. The advisory agreements are subject to initial review and approval. After the initial
two-year
term of the agreement for each ETF, the continuation of such agreement must be reviewed and approved at least annually by a majority of the Independent Trustees. In determining whether to approve the agreements, the Independent Trustees consider factors such as the nature and quality of the services provided by us, the fees charged by us and the costs and profits realized by us in connection with such services, as well as any ancillary or
“fall-out”
benefits from such services, the extent to which economies of scale are shared with the WisdomTree ETFs, and the level of fees paid by other similar funds. If the Independent Trustees determine that the advisory fees we charge to any particular fund are too high, we will need to reduce our fees, which could adversely affect our revenues.
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Damage to our reputation could adversely affect our business.
We believe we have developed a strong brand and a reputation for innovative, thoughtful products, favorable long-term investment performance and excellent client services. The WisdomTree name and brand is a valuable asset and any damage to it could hamper our ability to maintain and grow our AUM and attract and retain employees, thereby having a material adverse effect on our revenues. Risks to our reputation may range from regulatory issues to unsubstantiated accusations. Managing such matters may be expensive, time-consuming and difficult.
We are currently pursuing an exit from our investment in AdvisorEngine Inc. and if we are unsuccessful, we could lose our entire investment.
We are currently pursuing an exit from our investment in AdvisorEngine Inc., or AdvisorEngine. While the process is not yet finalized, we recognized an impairment charge of $30.1 million on our various financial interests during the year ended December 31, 2019 and now carry these financial interests at $28.2 million (See Note 8 to our Consolidated Financial Statements). If our anticipated exit is unsuccessful, the net carrying value of our investment could become fully impaired, which would have a material impact on our financial condition and results of operations and may cause a decline in the price of our common stock.
Risks Relating to our Common and Preferred Stock
The market price of our common stock has been fluctuating significantly and may continue to do so, and you could lose all or part of your investment.
The market price of our common stock has been fluctuating significantly and may continue to do so, depending upon many factors, some of which may be beyond our control, including:
  decreases in our AUM;
 
  variations in our quarterly operating results;
 
  differences between our actual financial operating results and those expected by investors and analysts;
 
  publication of research reports about us or the investment management industry;
 
  changes in expectations concerning our future financial performance and the future performance of the ETP industry and the asset management industry in general, including financial estimates and recommendations by securities analysts;
 
  our strategic moves and those of our competitors, such as acquisitions or consolidations;
 
  changes in the regulatory framework of the ETP industry and the asset management industry in general and regulatory action, including action by the SEC to lessen the regulatory requirements or shortening the process to obtain regulatory relief under the Investment Company Act that is necessary to become an ETP sponsor;
 
  the level of demand for our stock, including the amount of short interest in our stock;
 
  changes in general economic or market conditions; and
 
  realization of any other of the risks described elsewhere in this section.
 
In addition, stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock. Furthermore, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations or other derivative stockholder lawsuits. If such a suit were to arise, it could cause substantial costs to us and divert our resources regardless of the outcome.
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If equity research analysts issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control the opinions of these analysts. The price and trading volume of our common stock could decline if one or more equity analysts issue unfavorable commentary or downgrade our common stock or cease publishing reports about us or our business.
Preferred Shares issued in connection with the ETFS Acquisition contain redemption rights, which if triggered, could materially impact our financial position.
In connection with the ETFS Acquisition, we issued 14,750 shares of preferred stock, or Preferred Shares, to ETFS Capital which are convertible into 14,750,000 shares of our common stock, subject to certain restrictions. ETFS Capital also has redemption rights for the Preferred Shares to protect against corporate events such as our having an insufficient number of shares of authorized common stock to permit full conversion and if, upon a change of control of us, ETFS Capital does not receive the same amount per Preferred Share that it would have received had the Preferred Shares been converted prior to a change of control. Any such redemption will be at a price per Preferred Share equal to the dollar volume-weighted average price for a share of common stock for the
30-trading
day period ending on the date of such attempted conversion or change of control, as applicable, multiplied by 1,000.
Future issuances of our common stock could lower our stock price and dilute the interests of existing stockholders.
We may issue additional shares of our common stock in the future, either in connection with an acquisition or for other business reasons. The issuance of a substantial amount of common stock could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of common stock in the public market, either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such common stock as consideration or by investors who acquired such common stock in a private placement, could have a material adverse effect on the market price of our common stock.
A provision in our certificate of incorporation and
by-laws
may prevent or delay an acquisition of our company, which could decrease the market value of our common stock.
Provisions of Delaware law, our certificate of incorporation and our
by-laws
may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our Board of Directors. These provisions include:
  a classified Board of Directors;
 
  limitations on the removal of directors;
 
  advance notice requirements for stockholder proposals and nominations;
 
  the inability of stockholders to act by written consent or to call special meetings;
 
  the ability of our Board of Directors to make, alter or repeal our
by-laws;
and
 
  the authority of our Board of Directors to issue preferred stock with such terms as our Board of Directors may determine.
 
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting
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stock that our Board of Directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.
The payment of dividends to our stockholders and our ability to repurchase our common stock is subject to the discretion of our Board of Directors and may be limited by our financial condition, the credit agreement, and any applicable laws.
In November 2014, we commenced a quarterly cash dividend and intend to continue to pay regular dividends to our stockholders. In April 2019, our Board of Directors extended the term of our share repurchase program for three years through April 27, 2022, under which $83.4 million remained available for repurchases as of December 31, 2019. Under the credit agreement, we are required to comply with various covenants including a leverage test. A quarterly cash dividend payment in excess of $0.03 per share, as well as share repurchases other than for shares withheld pursuant to the terms of equity awards granted to employees to satisfy tax withholding obligations, are permitted only to the extent we comply with the leverage test and no event of default (as defined in the credit agreement) has occurred and is continuing at the time the cash dividend payment or share repurchase is made as the case may be. Our Board of Directors may, in its discretion, decrease, but not increase, the level of dividends in the future. Further, our Board of Directors continue to have the discretion to discontinue the payment of dividends entirely. Any determination as to the payment of dividends or stock repurchases, as well as the level of such dividends or repurchases, will depend on, among other things, general economic and business conditions, our level of AUM, our strategic plans, our financial results and condition, limitations associated with the credit facilities or other agreements that could limit the amount of dividends we are permitted to pay or the stock we may repurchase, and any applicable laws. If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient income from our business, we may need to reduce or eliminate the payment of dividends on our common stock or cease repurchasing our common stock. Any change in our stock repurchases or the level of our dividends or the suspension of the payment thereof could adversely affect our stock price.
In addition, our Board of Directors is authorized, without stockholder approval, to issue preferred stock with such terms as our Board of Directors may, in its discretion, determine. Our Board of Directors could, therefore, issue preferred stock with dividend rights superior to that of the common stock, which could also limit the payment of dividends on the common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
We have no unresolved comments from the SEC staff relating to our periodic or current reports filed with the SEC pursuant to the Exchange Act.
ITEM 2.
PROPERTIES
 
Our principal executive office is located at 245 Park Avenue, New York, New York 10167. We occupy approximately 38,000 square feet of office space under a lease that expires in July 2029. We believe that the space we lease is sufficient to meet our needs until the expiration of the lease.
ITEM 3.
LEGAL PROCEEDINGS
 
We may be subject to reviews, inspections and investigations by the SEC, CFTC, NFA, state and foreign regulators, as well as legal proceedings arising in the ordinary course of business. We are not currently party to
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any litigation that is expected to have a material impact on our business, financial position, results of operations or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “WETF.” As of December 31, 2019, there were 215 holders of record of shares of our common stock and we believe there were approximately 13,800 beneficial owners of our common stock.
In November 2014, we commenced a quarterly cash dividend and intend to continue to pay regular dividends to our stockholders. Under the terms of the credit agreement, we are required to comply with various covenants including a leverage test. A quarterly cash dividend payment in excess of $0.03 per share is permitted only to the extent we comply with the leverage test and no event of default (as defined in the credit agreement) has occurred and is continuing at the time the cash dividend payment is made. Our Board of Directors may, in its discretion, decrease, but not increase, the level of dividends in the future. Further, our Board of Directors has the discretion to discontinue the payment of dividends entirely. Any determination as to the payment of dividends, as well as the level of such dividends, will depend on, among other things, general economic and business conditions, our level of AUM, our strategic plans, our financial results and condition, limitations associated with the credit facilities or other agreements that could limit the amount of dividends we are permitted to pay, and any applicable laws.
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” of shares of our common stock.
On April 24, 2019, our Board of Directors extended the term of our share repurchase program for three years through April 27, 2022. During the three months ended December 31, 2019, we repurchased 31,850 shares of our common stock under this program for an aggregate cost of approximately $0.2 million. As of December 31, 2019, $83.4 million remained under this program for future purchases. Under the terms of the credit agreement, share repurchases are permitted only to the extent we comply with a leverage test and no event of default (as defined in the credit agreement) has occurred and is continuing at the time the stock repurchase is made. However, our ability to purchase shares of our common stock withheld pursuant to the terms of equity awards granted to employees to satisfy tax withholding obligations is not restricted.
                                 
 
Total Number
of Shares
Purchased
 
 
Average Price
Paid Per Share
 
 
Total Number of
Shares Purchased
as
Part of Publicly
Announced Plans
or Programs
 
 
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
 
Period
 
 
 
 
 
 
 
(in thousands)
 
October 1, 2019 to October 31, 2019
   
—  
    $
—  
     
—  
     
 
November 1, 2019 to November 30, 2019
   
—  
    $
—  
     
—  
     
 
December 1, 2019 to December 31, 2019
   
31,850
    $
4.84
     
31,850
     
 
                                 
Total
   
31,850
    $
4.84
     
31,850
    $
83,389
 
                                 
 
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ITEM 6.
SELECTED FINANCIAL DATA
 
You should read the selected consolidated financial data presented below in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and our consolidated financial statements and the related notes included elsewhere in this Report. The selected consolidated statements of operations data presented below under the heading “Consolidated Statements of Operations Data” for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated balance sheet data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this Report. The selected consolidated financial data presented below under the headings “Consolidated Statements of Operations Data” for the years ended December 31, 2016 and 2015 and under “Consolidated Balance Sheet Data” as of December 31, 2017, 2016 and 2015 have been derived from our consolidated financial statements not included in this Report. The historical results presented below are not necessarily indicative of the financial results to be expected for future periods.
                                         
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
 
(in thousands, except per share data)
 
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advisory fees
  $
265,652
    $
271,104
    $
226,692
    $
218,217
    $
297,944
 
Other income
   
2,751
     
3,012
     
1,603
     
703
     
371
 
                                         
Total revenues
   
268,403
     
274,116
     
228,295
     
218,920
     
298,315
 
                                         
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
   
80,761
     
74,515
     
81,493
     
63,263
     
73,228
 
Fund management and administration
   
61,502
     
56,686
     
42,144
     
41,083
     
42,782
 
Marketing and advertising
   
12,163
     
13,884
     
14,402
     
15,643
     
13,371
 
Sales and business development
   
18,276
     
17,153
     
13,811
     
12,537
     
9,189
 
Contractual gold payments
   
13,226
     
8,512
     
—  
     
—  
     
—  
 
Professional and consulting fees
   
5,641
     
7,984
     
5,254
     
6,692
     
7,067
 
Occupancy, communications and equipment
   
6,302
     
6,203
     
5,415
     
5,211
     
4,299
 
Depreciation and amortization
   
1,045
     
1,301
     
1,395
     
1,305
     
1,006
 
Third-party distribution fees
   
6,968
     
6,611
     
3,393
     
2,827
     
2,443
 
Acquisition and disposition-related costs
   
902
     
11,454
     
4,832
     
—  
     
—  
 
Other
   
8,083
     
8,534
     
7,068
     
6,909
     
6,187
 
                                         
Total expenses
   
214,869
     
212,837
     
179,207
     
155,470
     
159,572
 
                                         
Operating income
   
53,534
     
61,279
     
49,088
     
63,450
     
138,743
 
Other Income/(Expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
   
(11,240
)    
(7,962
)    
—  
     
—  
     
—  
 
(Loss)/gain on revaluation of deferred consideration—gold payments
   
(11,293
)    
12,220
     
—  
     
—  
     
—  
 
Interest income
   
3,332
     
3,093
     
2,861
     
1,111
     
681
 
Settlement gain
   
—  
     
—  
     
6,909
     
—  
     
—  
 
Impairments
   
(30,710
)    
(17,386
)    
—  
     
(1,676
)    
—  
 
Acquisition payment
   
—  
     
—  
     
—  
     
(6,738
)    
(2,185
)
Other losses, net
   
(3,502
)    
(205
)    
(666
)    
(585
)    
(54
)
                                         
Income before taxes
   
121
     
51,039
     
58,192
     
55,562
     
137,185
 
Income tax expense
   
10,546
     
14,406
     
30,993
     
29,407
     
57,133
 
                                         
Net (loss)/income
  $
(10,425
)   $
36,633
    $
27,199
    $
26,155
    $
80,052
 
                                         
(Loss)/earnings per share—diluted
(1)
  $
(0.08
)   $
0.23
    $
0.20
    $
0.19
    $
0.58
 
Weighted average common shares—diluted
(1)
   
151,823
     
158,415
     
136,003
     
135,539
     
138,825
 
Cash dividends declared per common share
  $
0.12
    $
0.12
    $
0.32
    $
0.32
    $
0.57
 
 
 
(1)
See Note 22 to our Consolidated Financial Statements
 
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2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
  $
74,972
    $
77,784
    $
54,193
    $
92,722
    $
210,070
 
Total assets
  $
935,207
    $
937,518
    $
254,985
    $
249,767
    $
292,693
 
Debt
  $
175,956
    $
194,592
    $
—  
    $
—  
    $
—  
 
Deferred consideration—gold payments (total)
  $
173,024
    $
161,540
    $
—  
    $
—  
    $
—  
 
Total liabilities
  $
465,226
    $
446,614
    $
62,034
    $
48,423
    $
58,191
 
Preferred stock—Series A
Non-Voting
Convertible
  $
132,569
    $
132,569
    $
—  
    $
—  
    $
—  
 
Stockholders’ equity
  $
337,412
    $
358,335
    $
192,951
    $
201,344
    $
234,502
 
 
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A. “Risk Factors” of this Report. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Introduction
We are the only publicly-traded asset management company that focuses exclusively on ETPs and are a leading global ETP sponsor based on AUM, with AUM of $63.6 billion globally as of December 31, 2019. An ETP is a pooled investment vehicle that holds a basket of securities, financial instruments or other assets and generally seeks to track (index-based) or outperform (actively managed) the performance of a broad or specific equity, fixed income or alternatives market segment, commodity or currency (or an inverse or multiple thereof). ETPs are listed on an exchange with their shares traded in the secondary market at market prices, generally at approximately the same price as the net asset value of their underlying components. ETP is an umbrella term that includes ETFs, exchange-traded notes and exchange-traded commodities.
Our family of ETFs includes funds that track our own indexes, funds that track third-party indexes and actively managed funds. Most of our equity-based funds employ a fundamentally weighted investment methodology, which weights securities based on factors such as dividends, earnings or investment factors, whereas most other ETF industry indexes use a capitalization weighted methodology. We distribute our ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers primarily through our sales force. Our sales efforts are not directed towards the retail segment but rather are directed towards financial or investment advisers that act as intermediaries between the
end-client
and us.
We focus on creating ETFs for investors that offer thoughtful innovation, smart engineering and redefined investing. We have launched many
first-to-market
ETFs and pioneered alternative weighting methods commonly referred to as “smart beta.” However, our U.S. listed ETFs are not beta, but rather an investment approach we call “Modern Alpha,” which combines the outperformance potential of active management with the benefits of passive management to offer investors cost-effective funds that are built to perform.
Through our operating subsidiaries, we provide investment advisory and other management services to our ETPs collectively offering ETPs covering equity, commodity, fixed income, leveraged and inverse, currency and alternative strategies. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETPs’ average daily AUM. Our expenses are predominantly related to selling, operating and marketing our ETPs. We have contracted with third parties to provide certain operational services for the ETPs.
We strive to deliver a better investing experience through innovative solutions. Continued investments in technology-enabled services and our Advisor Solutions program, which includes portfolio construction, asset allocation, practice management services and digital tools for financial advisors, are meant to differentiate us in the market, expand our distribution and further enhance our relationships with financial advisors.
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Executive Summary
We are focused on diversifying and growing our AUM and several important strategic initiatives that have been prioritized have contributed to modest organic growth. Our organic growth has benefited from the expansion and diversification of our product
line-up,
investments in technology-enabled services and our award-winning Advisor Solutions program, the transformation of our distribution reach and approach through an industry leading data intelligence function, prioritization of the development and distribution of our fully open architecture model portfolios and the integration of our recently acquired European business.
Negative investor sentiment toward HEDJ and DXJ has overshadowed the steps we have taken. Over the last three years, we have experienced $13.0 billion of net outflows from two these products, which have masked strong inflows into our fixed income, U.S. equity, commodity and emerging markets products. During the years ended December 31, 2017, 2018 and 2019, global net inflows were $3.7 billion, $3.2 billion and $3.3 billion, excluding outflows from HEDJ and DXJ.
The ETFS Acquisition, which we completed in April 2018, provided us with immediate scale in Europe, an industry leading position in European listed gold and commodity products, greater AUM diversification globally, and profitability within our International Business segment. Organic growth in Europe has been compelling with $1.6 billion of net inflows and 14.7% of AUM growth experienced since the completion of the acquisition.
Organic growth remains our focus and the execution of our strategic priorities have us better situated to capitalize on significant opportunities in the growing global ETP market.
Business highlights include the following:
  In January 2020, we entered into an agreement to collaborate with Professor Jeremy Siegel to design and launch two model portfolios—The Siegel-WisdomTree Global Equity Model and the Siegel-WisdomTree Longevity Model.
 
 
 
  In December 2019, we made an $8.1 million strategic investment in Securrency, Inc., a leading developer of institutional-grade blockchain-based financial and regulatory technology, with plans to pursue the integration of blockchain technology into the ETF ecosystem.
 
 
 
  In December 2019, our full range of U.S. listed ETFs were made available commission-free on LPL Financial’s online trading platform.
 
 
 
  In December 2019, we launched our first cryptocurrency product, the WisdomTree Bitcoin ETP, a physically-backed Bitcoin ETP which provides investors with a simple, secure and cost-efficient way to gain exposure to Bitcoin while utilizing the best of traditional financial infrastructure and product structuring.
 
 
 
  In November 2019, we entered into a definitive agreement to sell all of the outstanding shares of our wholly-owned Canadian subsidiary to CI Financial, allowing us to benefit from the scale and resources of CI Financial and participate more cost effectively in the continued growth of the Canadian ETF market by providing index licenses for each of the WisdomTree Canada ETFs that currently track WisdomTree proprietary indexes. The transaction was completed on February 19, 2020.
 
 
 
  In October 2019, we completed the final stage of integration of the ETFS acquired business, which included the unification of 224 products under one WisdomTree brand and closure of 192 duplicative or extraneous products across our full product set.
 
 
 
  In March and June 2019, we expanded our offerings of our ETPs on Swissquote’s and BNY Mellon’s Pershing Fundvest
®
platforms.
 
 
 
  In April 2019, we won two 2019 ETF.com Awards:
Index of the Year
—The WisdomTree U.S. Multifactor Index and
Best New Asset Allocation ETF
—The WisdomTree 90/60 U.S. Balanced Fund
 
 
 
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  (NTSX). We also won two 2019 Mutual Fund Industry & ETF Awards:
ETF of the Year
—The WisdomTree Floating Rate Treasury Fund (USFR) and
ESG/Impact ETF of the Year
—The WisdomTree Emerging Markets
ex-State-Owned
Enterprises Fund (XSOE).
 
 
 
  In March 2019, we launched our Investor Solutions program and Digital Portfolio Developer (DPD) in Europe. Building on the success of the Advisor Solutions program in the U.S., the program aims to help investment managers to engage more effectively with clients and prospects and modernize portfolios to meet evolving investor needs.
 
 
 
  In March 2019, we launched USFR on the London Stock Exchange, making U.S. floating rate notes available to European investors in an ETF for the first time.
 
 
 
  We launched 5 new U.S. listed ETFs and 4 new International listed ETPs.
 
 
 
  In connection with our capital management strategy, we used $21.0 million of our available capital to begin to pay down our debt and we returned approximately $22.7 million to our stockholders largely through our ongoing quarterly cash dividend and to a lesser extent, through stock repurchases.
 
 
 
Background
Market Environment
The following chart reflects the annual returns of the broad-based equity indexes and gold prices over the last three years. As shown below, while volatile, the broad-based equity market indexes and gold prices have all appreciated during this timeframe.
 
Source: FactSet
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U.S. listed ETF Industry Flows
U.S. listed ETF net flows for the year ended December 31, 2019 were $328 billion. Fixed income and U.S. equity gathered the majority of those flows.
 
Sources: Bloomberg, Investment Company Institute, WisdomTree.
International ETP Industry Flows
International ETP net flows were $140 billion for the year ended December 31, 2019. Fixed income and equities gathered the majority of those flows.
 
Source: Morningstar
Industry Developments
Competition and Fee Pressures
The asset management industry is highly competitive and we face substantial competition in virtually all aspects of our business. Factors affecting our business include fees for our products, investment performance, brand recognition, business reputation, quality of service and the continuity of our financial advisor and platform relationships. We compete directly with other ETF sponsors and mutual fund companies and indirectly against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions. The vast majority of the firms we compete with are subsidiaries of large diversified financial companies and many others are much larger in terms of AUM, years in operations and revenues and, accordingly, have much larger sales organizations and budgets. In addition, these larger competitors may attract business through means that are not currently available to us, including retail bank offices, investment banking, insurance agencies and broker-dealers.
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The ETF industry is becoming significantly more competitive. Existing players have broadened their suite of products offering strategies that are, in some cases, similar to ours and large traditional asset managers are also launching ETFs, some with similar strategies as well.
There also has been increased price competition in not only commoditized product categories such as traditional, market capitalization weighted index exposures, but also in fundamental or other
non-market
capitalization weighted or factor-based exposures. Fee reduction by certain of our competitors has been a trend over the last few years and continues to persist and many of our competitors are well positioned to benefit from this trend. Certain larger competitors are able to offer products at lower price points or otherwise as loss leaders due to other revenue sources available within such competitors that are currently unavailable to us. Funds are being offered with fees of 20 bps or less, which have attracted approximately 76% of the net flows globally during the last three years. However, while the
low-cost
ETFs have accumulated a significant amount of AUM recently, we estimate these same funds represent only approximately 32% of global revenues.
In the ETF industry, being a first mover, or one of the first providers of ETFs in a particular asset class, can be a significant advantage, as the first ETF in a category to attract scale in AUM and trading liquidity is generally viewed as the most attractive ETF. We believe that our early launch of ETFs in a number of asset classes or strategies, including fundamental weighting and currency hedging along with gold and commodities and certain fixed income categories, positions us well to maintain our position as one of the leaders of the ETF industry. Additionally, we believe our affiliated indexing or “self-indexing” model, as well as our more recent active ETFs, enable us to launch proprietary products that do not have exact competition and are positioned to generate alpha versus benchmarks. As investors increasingly become more comfortable with the ETF structure, we believe there will be greater focus on
after-fee
performance rather than using ETFs primarily as
low-cost
market access vehicles. While we have selectively lowered fee rates on certain products that have yet to attain scale, and there is no assurance that we will not lower fee rates on certain ETFs in the future, our strategy continues to include launching new funds in the same category with a differentiated exposure at a lower fee rate, rather than reducing fees on existing ETFs with a significant amount of AUM, long performance track records, and secondary market liquidity. We generally believe we are well positioned from a product pricing perspective.
While we are not immune to fee pressure, we believe our ability to successfully compete will depend largely on our competitive product offerings and our ability to offer exposure to compelling investment strategies with strong
after-fee
performance, develop distribution relationships, create new investment products, build trading volume, AUM and outperforming track records in existing funds, offer a diverse platform of investment choices, promote thought leadership and a differentiated solutions program, build upon our brand and attract and retain talented sales professionals and other employees.
Custodial Platforms
Recently, several of the largest custodial platforms and online brokerage firms eliminated trading commissions for ETFs. Our arrangements with these platforms had offered us preferred or exclusive access for our products, enabling investors to purchase our ETFs without paying commissions. While exclusivity is no longer available, the elimination of commissions removes a component of trading costs previously affecting ETFs and is therefore a positive development for the ETF industry. ETF sponsors are also now better positioned to target access to all platforms, thereby creating additional opportunities. We expect cost savings going forward from the elimination of these arrangements.
Regulatory Developments
The ETF industry continues to evolve with the introduction of new rules and regulations, such as the following:
 
ETF Rule.
In September 2019, the SEC approved Rule
6c-11,
commonly referred to as the “ETF Rule,” which became effective in December 2019 and ETF issuers have one year to implement. The rule is
 
 
 
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  designed to simplify the rules governing ETFs. The rule includes several items that will level the playing field for ETF issuers, including removing the need to file for exemptive relief in order to issue most types of ETFs, which historically has been a costly and time consuming process, removing the regulatory distinction between actively managed and index-based ETFs (including removing specific requirements associated with self-indexed ETFs) and making custom baskets available to all issuers subject to policy and procedure requirements. The rule also requires issuers to disclose a number of items in a standardized format on daily basis, including portfolio holdings and median
bid-ask
spread over the prior
30-day
period.
 
 
 
Regulation Best Interest.
In June 2019, the SEC adopted Regulation Best Interest, which requires broker-dealers to act in the best interest of their retail customers when making a recommendation. The SEC also adopted the Form CRS relationship summary, which requires registered investment advisers and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. Regulation Best Interest, Form CRS and the related rule became effective in September 2019 and compliance is required by June 30, 2020. Congress and individual state legislatures have continued to debate, and in some instances taken further action, in seeking to ensure heightened standards.
 
 
 
Non-Transparent Active ETFs.
During 2019, the SEC approved multiple proposals for
non-transparent
active ETFs which are products that are not required to disclose their holdings daily, as most ETFs currently are required to do. It is anticipated that the first
non-transparent
active ETFs will launch by the summer of 2020.
 
 
While the ETF Rule will further lower barriers to entry, we view the passage of the rule positively. The ETF Rule will allow for enhancements in indexes that we create and for broader product development opportunities associated with ETFs tracking such indexes. Wider use of custom baskets will promote efficiency in the creation and redemption process, which could lead to greater tax efficiency and liquidity and tighter
bid-ask
spreads. Enhanced and uniform data disclosures also will increase transparency and help investors understand the costs and benefits of investing in ETFs. In addition, we believe that the heightened focus on fiduciary and best interest standards will continue to raise investor awareness of the inherent benefits that ETFs provide—transparency, tax efficiency and liquidity—which we believe will expand ETFs’ competitiveness generally.
We are also of the view that transparency in holdings is one of the hallmarks and benefits of the ETF structure. While market commentators believe that
non-transparent
active ETFs may lead to increased competition in the ETF industry as some of the largest asset managers who previously did not want to disclose holdings on a daily basis may now enter the ETF space, these
non-transparent
ETFs may fact distribution challenges from gatekeepers and platforms that have been accustomed to greater transparency. It is also unclear how the decreased transparency will impact the liquidity of these
non-transparent
ETFs.
Additionally, we believe the shift toward
fee-based
models will benefit the ETF industry and overall usage of ETFs likely will increase, as ETFs generally charge lower fees than mutual funds. Regulations that discourage a commission model and mandate transparency of fees should be conducive for ETF growth.
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Components of Operating Revenue
Advisory fees
Substantially all of our revenues are comprised of advisory fees we earn from our ETPs. These advisory fees are calculated based on a percentage of the ETPs’ average daily net assets. Our weighted average fee rates by product category are as follows:
                     
Commodity & Currency:
   
36bps
   
Leveraged & Inverse:
   
93bps
 
International Equity:
   
54bps
   
Fixed Income:
   
20bps
 
U.S. Equity:
   
30bps
   
Alternatives:
   
73bps
 
Emerging Market Equity:
   
56bps
   
   
 
 
 
We determine the appropriate advisory fee to charge for our ETPs based on the cost of operating each ETP considering the types of securities the ETPs will hold, fees third-party service providers will charge us for operating the ETPs and our competitors’ fees for similar ETPs. From time to time, we implement voluntary waivers of a portion of our advisory fee. In addition, we earn a fee based on daily aggregate AUM of our ETPs in exchange for bearing certain fund expenses.
Our advisory fee revenues may fluctuate based on general stock market trends, which include market value appreciation or depreciation, currency fluctuations against the U.S. dollar, increased competition and level of inflows or outflows from our ETPs.
Other income
Other income includes creation/redemption fees earned on our European
non-UCITS
products and fees from licensing our indexes to third parties.
Components of Operating Expenses
Our operating expenses consist primarily of costs related to selling, operating and marketing our ETPs as well as the infrastructure needed to run our business.
Compensation and benefits
Employee compensation and benefits expenses are expensed when incurred and include salaries, incentive compensation, and related benefit costs. Virtually all our employees receive incentive compensation that is based on our operating results as well as their individual performance. Therefore, a portion of this expense will fluctuate with our business results. To attract and retain qualified personnel, we must maintain competitive employee compensation and benefit plans. We would expect changes in employee compensation and benefits expense to be correlated with changes in our revenues and net inflows.
Also included in compensation and benefits are costs related to equity awards granted to our employees. Our executive management and Board of Directors strongly believe that equity awards are an important part of our employees’ overall compensation package and that incentivizing our employees with equity in the Company aligns the interest of our employees with that of our stockholders. We use the fair value method in recording compensation expense for equity-based awards. Under the fair value method, compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the vesting period.
For the year ending December 31, 2020, we estimate that our compensation and benefits expense will be $75 million to $85 million.
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Fund management and administration
Fund management and administration expenses are expensed when incurred and are comprised of the following costs we pay third-party service providers to operate our ETPs:
  portfolio management of our ETPs
(sub-advisory);
 
 
  fund accounting and administration;
 
 
  custodial and storage services;
 
 
  market making;
 
 
  transfer agency;
 
 
  accounting and tax services;
 
 
  printing and mailing of stockholder materials;
 
 
  index calculation;
 
 
  indicative values;
 
 
  distribution fees;
 
 
  legal and compliance services;
 
 
  exchange listing fees;
 
 
  trustee fees and expenses;
 
 
  preparation of regulatory reports and filings;
 
 
  insurance;
 
 
  certain local income taxes; and
 
 
  other administrative services.
 
 
We are not responsible for extraordinary expenses, taxes and certain other expenses.
We depend on a number of parties to provide critical portfolio management services to our ETPs. The fees we pay our
sub-advisers
generally have minimums per fund which range from $25,000 to $112,000 per year with additional fees ranging between 0.015% and 0.20% of average daily AUM at various breakpoint levels depending on the nature of the ETP. In addition, we pay certain costs based on transactions in our ETPs or based on inflow levels.
The fees we pay for accounting, tax, transfer agency, index calculation, indicative values and exchange listing are based on the number of ETFs we have. The remaining fees are based on a combination of both AUM and number of funds, or as incurred.
For the year ending December 31, 2020, we estimate that our gross margin percentage will be 77% to 78% at current AUM/revenue levels. We define gross margin as total operating revenues less fund management and administration expenses. Gross margin percentage is calculated as gross margin divided by total operating revenues.
Marketing and advertising
Marketing and advertising expenses are recorded when incurred and include the following:
  advertising and product promotion campaigns that are initiated to promote our existing and new ETPs as well as brand awareness;
 
 
  development and maintenance of our website; and
 
 
  creation and preparation of marketing materials.
 
 
Our discretionary advertising comprises the largest portion of this expense. In addition, we may incur expenditures in certain periods to attract inflows, the benefit of which may or may not be recognized from increases to our AUM in future periods. However, due to the discretionary nature of some of these costs, they can generally be reduced if there were a decline in the markets.
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Sales and business development
Sales and business development expenses are recorded when incurred and include the following:
  travel and entertainment or conference related expenses for our sales force;
 
 
  market data services for our research team;
 
 
  sales related software tools;
 
 
  voluntary payment of certain costs associated with the creation or redemption of ETF shares, as we may elect from time to time; and
 
 
  legal and other advisory fees associated with the development of new funds or business initiatives.
 
 
Contractual gold payments
Contractual gold payments expense represents an ongoing obligation of ETFS Capital that we assumed in connection with the ETFS Acquisition. This ongoing obligation requires us to pay 9,500 ounces of gold annually from the advisory fee income we earn for managing physically backed gold ETPs. See Note 12 to our Consolidated Financial Statements for additional information.
Professional and consulting fees
Professional fees are expensed when incurred and consist of fees we pay to corporate advisers including accountants, tax advisers, legal counsel, investment bankers, human resources or other consultants. These expenses fluctuate based on our needs or requirements at the time. Certain of these costs are at our discretion and can fluctuate year to year.
Occupancy, communications and equipment
Occupancy, communications and equipment expense includes costs for our corporate headquarters in New York City as well as office related costs in our other locations.
Depreciation and amortization
Depreciation and amortization expense results primarily from amortization of leasehold improvements to our office space as well as depreciation on fixed assets we purchase, which is depreciated over five to fifteen years.
Third-party distribution fees
Third-party distribution fees include payments made to enable our ETFs to be included on certain third-party platforms in exchange for commission-free trading or other preferential access and data. These expenses also include payments to our third-party marketing agents in Latin America and Israel. For the year ending December 31, 2020, we estimate that third-party distribution fees will be approximately $7.0 million, which is unchanged from 2019 as savings from platforms that recently eliminated trading commissions for ETFs are expected to be reinvested in existing and new global platform relationships.
Acquisition and disposition-related costs
Acquisition and disposition-related costs are principally associated with costs incurred in connection with the ETFS Acquisition, including integration costs recognized following its completion. Also included are costs associated with the sale our Canadian business, which was completed on February 19, 2020.
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Other
Other expenses consist primarily of insurance premiums, general office related expenses, securities license fees for our sales force, public company related expenses, corporate related travel and entertainment and board of director fees, including stock-based compensation related to equity awards we granted to our directors.
Components of Other Income/(Expenses) of a Recurring Nature
Interest expense
Interest expense is associated with our debt and revolving Credit Facility. We recognize interest expense using the effective interest method which includes the amortization of issuance costs.
Revaluation of deferred consideration—gold payments
Deferred consideration arose in connection with the ETFS Acquisition and is remeasured each reporting period using forward-looking gold prices and a selected discount rate. See Note 12 to our Consolidated Financial Statements for additional information.
Interest income
Interest income, which is recognized on an accrual basis, arises on our note receivable and from investing our corporate cash.
Other gains and losses, net
Included herein are gains and losses arising from foreign exchange, the sale of gold earned from advisory fees paid by physically-backed gold ETPs, and other miscellaneous items.
Income Taxes
Our income tax expense consists of taxes due to federal, various state and local and certain foreign authorities. The effective tax rate was not meaningful as our income before income taxes was $0.1 million. The effective tax rate differs from the federal statutory rate of 21% primarily due to a valuation allowance on capital losses and foreign net operating losses, a
non-deductible
loss on revaluation of deferred consideration,
non-deductible
executive compensation, state and local income taxes and tax shortfalls associated with the vesting and exercise of stock-based compensation awards, partly offset by a $4.3 million reduction in unrecognized tax benefits and a lower tax rate on foreign earnings.
We currently anticipate that our consolidated normalized effective tax rate will be approximately 27% for the year ending December 31, 2020. This estimated rate may change and is dependent upon our actual taxable income earned in relation to our forecasts as well as any other items which may arise that are not currently forecasted. Such items may include, but are not limited to, any revaluation on deferred consideration and any stock-based compensation windfalls or shortfalls.
Factors that May Impact our Future Financial Results
Revenues
Our global AUM is well diversified across the commodity, U.S. equity, international developed markets and emerging markets sectors. As a result, our operating results are particularly exposed to investor sentiment toward investing in these products’ strategies and our ability to maintain AUM of these products, as well as the performance of these products.
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Our concentrations in HEDJ and DXJ have declined dramatically over the last three years from 35% at December 31, 2017 to 10% at December 31, 2019, as negative investor sentiment toward these strategies led to net outflows of $13.0 billion during this timeframe. These outflows largely have been offset by strong inflows into our U.S. equity, fixed income, commodity and emerging markets products. During the years ended December 31, 2017, 2018 and 2019 net inflows were $3.7 billion, $3.2 billion and $3.3 billion, excluding outflows from HEDJ and DXJ.
While HEDJ and DXJ outflows have been mitigated by inflows into our other products, our revenues are highly correlated to the level and relative mix of our AUM, as well as the fee rate associated with our ETPs. Changes in product mix have led to a decline in our average global advisory fee, which, for the years ended December 31, 2017, 2018 and 2019 were 0.50%, 0.48% and 0.45%, respectively.
The chart below sets forth the asset mix of our ETPs for the last three years:
 
 
Key Operating Statistics
The following table presents key operating statistics that serve as indicators for the performance of our business:
                         
 
Years Ended December 31,
 
 
2019
 
 
2018
 
 
2017