Jim Wiandt

As VIPERs Assets Soar, Vanguard Suffers Another Legal Setback

Even as the total market VIPERs ETF offering from Vanguard drew a flood of new assets, Vanguard suffered a legal defeat to Standard & Poor's that was described by a Vanguard spokesman as "final."

Paul Aaronson, Executive Managing Director of Porfolio Services at Standard & Poor's noted that the decision confirmed that, "We are the masters of our own universe when it comes to our intellectual property."

In dispute had been the Vanguard Group's ability launch exchange-traded funds (ETFs) based on S&P indices under their existing licensing agreements. Vanguard's announcement of its impending launch last year seemed to catch Standard & Poor's by surprise, as the erstwhile index provider had apparently entered into agreements that included exclusivity provisions with another ETF sponsor. Vanguard claimed throughout the dispute that the new ETFs were simply a share class of the S&P 500 mutual fund, and fell under the terms of Vanguard's existing licencing agreements with S&P.

The original U.S. District Court judgment by Alvin K Hellerstein was handed down in April. The U.S. Court of Appeals for the Second Circuit simply affirmed the decision with a brief one page order.

Announcing the Appellate Court decision with a press release this afternoon, the McGraw-Hill Companies (which owns Standard & Poor's) expressed pleasure that the Court had accepted S&P's position in the lawsuit.

“The Appellate Court decision affirms our position that Standard & Poor’s indexes are the intellectual property of Standard & Poor’s and that all issuers of financial products who tie their products to our indexes must abide by the terms of our license agreements,” said Leo C. O’Neill, president of Standard & Poor’s. “By re-affirming Standard & Poor’s rights under its licensing agreements, the ruling strengthens our ability to work with fund managers to develop innovative, index-based products that serve the interests of all investors.”

The Appellate Court agreed with the District Court that the proposed Vanguard VIPERs were not authorized under the terms of the index license that Standard & Poor’s had previously granted to Vanguard to create mutual funds tied to certain S&P indices. In its decision, the Court accepted Standard & Poor's position that VIPERs shares represent a fundamentally different type of investment product than conventional mutual fund shares.

All is Not Lost

Even as it's S&P brethren suffered defeat, the Total Stock Market VIPERs showed an extraordinary knack for attracting new assets. After less than 6 months of existance, the Total Market VIPERs vaulted into the top ten list of ETFs by assets.

Source: Amex data as of 11/02/2001          

The interesting thing is that few of the assets have come from existing shareholders in the traditional fund switching to the ETF share class. This is in part because of the $50 fee to make the switch, and also because larger investors can still participate in the traditional fund with Admiral shares at cheaper expense ratios than the ETF.

A flood of new assets has entered the VIPERs fund in the last month or so, and many of the new shareholders have been institutional investors like Lehman Brothers, Morgan Stanley, and even Fidelity.

New Admiral Shares

Speaking of Admiral shares...Vanguard announced the addition of an Admiral share class for 18 additional funds including the Windsor, Midcap and major bond and sector funds.

Global ETF Asset Market Share

State Street Global Advisors released an overview of global ETF assets by fund manager. Here is a summary of the summary which lists global ETF asset data as of October 31, 2001.:

Source: State Street Global Advisors. Data as of 10/31/2001

Dr. Index Has Left The Building

Unconfirmed reports indicate that Barclays Global Investor's Brad Zigler, the venerable Dr. Index of iShares Web site fame, has left the company. Zigler was the head of investor education at BGI.