Access the Growth of Platform Companies with an ETF

schwartzfinal
Executive Vice President, Global Head of Research
05/22/2019

WisdomTree is known as a dividend and value investing shop. This reputation stems from our roots, launching indexes that rebalanced away from market capitalization, and toward fundamentals, such as dividends and earnings, in an attempt to guard against speculative bubbles.

 

But we are always looking for innovative baskets that offer the potential to outperform the market, whether it’s from rules-based rebalancing, an active combination of factors or other themes that can add value over time.

 

Here’s an example that’s come to fruition: We believe there’s a compelling, long-term market opportunity created by the evolution of platform business models. We’re excited to announce the launch of the WisdomTree Modern Tech Platforms Fund (PLAT), which provides exposure to these technology-driven platform companies. WisdomTree defines a modern technology platform as a company with a non-linear, multi-sided business model focused on creating value by facilitating interactions between two or more interdependent groups through technology.

Successful platform-based businesses create large, scalable networks that facilitate transactions between interdependent groups of consumers and producers. While the traditional business model creates value through linear supply chain production, a platform business is a non-linear1, asset-light model that creates value through connections. Many are gaining market share at the expense of traditional linear businesses, and doing so with better economies of scale and long-term profitability figures.

 

At a certain size, the benefit of further scale can be limited for a linear business but remains unlimited for a platform. Platform businesses can benefit from network effects, as networks become increasingly valuable to users as they grow. Put another way, the marginal cost of adding an additional user approaches zero as a platform scales; conversely, a linear model reaches a point where the marginal cost outweighs the benefit.

 

The structural advantages of the platform-based businesses we seek to invest in are reflected in financial metrics as solid revenue growth, margin expansion, substantial free cash flow generation and strong returns on capital.

 

Relative to the companies in the S&P 500 Index, the constituents of the WisdomTree Modern Tech Platforms Index (WTMDPL) have generated greater revenue growth and consistent mid-teens earnings growth.2

 

WTMDPL Median Sales and Earnings Growth

WTMDPL Median Sales and Earnings Growth 

 

These businesses have penetrated many sectors of the economy. There are nine distinct platform models, defined by the type of transaction being coordinated through a company’s network.

 

WTMDPL Platform and Sector Exposures

WTMDPL Platform and Sector Exposures 

 

Investment Methodology

 

To build this new Index, WisdomTree licensed data from Applico, a platform consulting business. Applico’s founder and CEO, Alex Moazed, and principal, Nicholas Johnson, researched platform models extensively to write Modern Monopolies, an Amazon best seller, detailing the characteristics of different platforms.

 

WTMDPL is an equally weighted Index composed of mid- and large-cap companies. The WisdomTree Modern Tech Platforms Fund seeks to track the price and yield performance, before fees and expenses, of WTMDPL.

 

Modernizing Your Portfolio

 

PLAT provides exposure to U.S., Asian and European equities with strong past and prospective fundamental growth and could be a suitable candidate to complement or replace growth-oriented investment strategies.

 

Index Holdings and Statistics

WTMDPL Index Holding and Stats

 

 

 

 

1Linear business models create value downstream through a supply chain; non-linear business models do not create value downstream through a supply chain.

21- and 3-year median sales growth for WTMDPL and the S&P 500 Index are calculated as the median value of each constituent’s 1- and 3-year annualized sales growth metrics. 1- and 3-year median earnings growth for WTMDPL and the S&P 500 Index are calculated as the median value of each constituent’s 1- and 3-year annualized net income, adjusted for unusual items, growth metrics.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal.  Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty; these risks may be enhanced in emerging, offshore or frontier markets.  Technology platform companies have significant exposure to consumers and businesses and a failure to attract and retain a substantial number of such users to a company’s products, services, content or technology could adversely affect operating results. Technological changes could require substantial expenditures by a technology platform company to modify or adapt its products, services, content or infrastructure. Technology platform companies typically face intense competition and the development of new products is a complex and uncertain process. Concerns regarding a company’s products or services that may compromise the privacy of users, or other cybersecurity concerns, even if unfounded, could damage a company’s reputation and adversely affect operating results. Many technology platform companies currently operate under less regulatory scrutiny but there is significant risk that costs associated with regulatory oversight could increase in the future.  The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. The composition of the Index is heavily dependent on quantitative and qualitative information and data from one or more third parties and the Index may not perform as intended.  Please read the Fund's prospectus for specific details regarding the Fund's risk profile.

 

References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

About the Contributor
schwartzfinal
Executive Vice President, Global Head of Research
Jeremy Schwartz has served as our Executive Vice President, Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.