In an attempt to expand its global index business and exchange traded funds (ETFs) portfolio, Nasdaq OMX Group Inc. (NDAQ) inked a strategic deal to buy Virginia-based leading private investment advisory firm – Dorsey, Wright & Associates (DWA). The acquisition is valued at $225 million and is expected to culminate by Mar 2015.
The transaction is expected to be accretive to earnings immediately upon closing. Although Nasdaq aims to fund the deal with its prevailing cash and debt, management does not expect any significant burden on financial leverage and capital return.
The merger will strengthen Nasdaq’s current global index platform with the addition of 17 ETFs from a strong DWA portfolio, thereby expanding the former’s existing 69 licensed smart beta ETFs portfolio. The company’s smart beta index portfolio focuses on dividend and income growth strategies, which are the highest growth sectors in ETFs, and hence are widely renowned in the ETF market.
With assets worth over $45 billion targeted to its family of smart beta indexes and more than $105 billion benchmarked to all Nasdaq indexes, Nasdaq’s global index business will be the leading smart beta index with the addition of DWA’s ETF portfolio.
Growth of Smart Beta & Global Index
Over the past few years, Nasdaq has been aggressively building a strong global index business by strengthening its distribution, technology and product generation capacities. In this regard, the company had acquired the index businesses of Mergent Inc. and Indix in Oct 2012, which have outperformed its targets in the last two years, generating 100% licensed asset growth.
Meanwhile, Nasdaq already has a strategic integration and growth plan for DWA, whereby it aims to draw market attention to the latter’s analytical and product development capabilities, based on smart beta models, to help users choose better-performing companies compared to its peers.
Some of the most recognised ETFs that track DWA global indexes are PowerShares DWA Emerging Markets Momentum Portfolio (PIE) with a Zacks Rank #3 (Hold), along with First Trust Dorsey Wright Focus 5 ETF (FV), Powershares DWA Momentum Portfolio (PDP) and PowerShares DWA SmallCap Momentum Portfolio (DWAS). In 2014, the fourth largest ETF provider in the US, Invesco Ltd. (IVZ), moved 10 of its ETFs to DWA indexes.
Alongside, Nasdaq expects to expand these indexes to newer asset classes as well as expansion in the markets of Canada and Europe over time. These efforts will further strengthen the company’s clientele, particularly, with other ETF providers, thereby diversifying business and amplifying long-term growth prospects.
The limitations of the global exchange industry reflect the need to respond to the changing business dynamics. Hence, given the ongoing critical times faced within equity and derivative trading volumes, we believe Nasdaq’s move has been small but smart for fortifying roots in the widely flourishing ETF industry, which peaked over $2 trillion in assets under management in the US in 2014. Morningstar estimates that 59% or about $115.8 million of new investor money in ETFs have been absorbed by smart beta ETFs since Jan 2013.
Nasdaq’s focus on gaining a mighty share of this booming space will directly challenge existing players like S&P Dow Jones Indices, MSCI and FTSE Group, while healthy competition will enable expense reduction for investors. On the other hand, diversification and gaining scale of ETFs will give the company a competitive advantage against its arch-rivals like Intercontinental Exchange Inc. (ICE) and CME Group Inc. (CME). Given the bulk of opportunities in this industry, more acquisitions in this space are likely to be undertaken by Nasdaq, if deemed strategically sound.
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