Stock indexes continue to become increasingly popular, with investors seeking diversified exposure to multiple sectors of the economy. But what exactly are stock indexes, and what are the secrets behind these brands?
As investors, we are all familiar with the term “stock indexes.” They are commonly used to measure the performance of a group of stocks.
Investing in stock index exchange-traded funds (ETFs) is becoming increasingly popular among retail and institutional investors. ETFs are investment vehicles that track indexes and mirror the performance of specific stock market segments. Licensing opportunities for stock index ETFs are available to various issuers, from small start-ups to well-established asset managers.
However, behind the scenes of these indexes lie trade secrets, know-how, and brands closely guarded by the companies that create them. These invaluable pieces of IP enable them to create accurate and reliable indexes that investors can rely on to make informed decisions about their investments.
Acquiring the licensing rights to these indexes is a complicated and costly process. In this blog post, we’ll explore the basics of stock index ETF licensing, from the different types of indexes and brands to the terms of the licensing agreement and licensing fees.
Stock Index Brands
Several prominent stock index brands include S&P, Dow Jones, MSCI, and FTSE Russell. These brands are widely recognized, and their indexes are followed by investors worldwide. Acquiring the licensing rights to an index from one of these brands can provide a significant competitive advantage for an ETF issuer, allowing them to offer a product with a well-established and reputable index.
Types of Indexes and ETFs
There are many indexes, each covering different market segments and using different methodologies. Some indexes focus on particular sectors or industries, such as technology or healthcare, while others cover the entire market. Similarly, some ETFs track indexes with different investment styles, such as value or growth, or that seek to replicate the performance of different asset classes, such as fixed income or commodities. Choosing the right index and ETF type to license depends on an issuer’s strategy and investment objectives.
Acquiring Licensing Rights to ETFs
The most popular indexes are licensed to multiple ETF issuers, and fees for these licenses vary depending on the index, the brand, and the issuer’s negotiating power. Competition for licensing rights to popular indexes can be intense, and the resulting fees can be substantial. Some ETF issuers may create custom indexes, decreasing the competition and lowering license fees. However, custom indexes require extensive research and development and may not be as well-recognized and trusted as established indexes from well-known brands.
Terms of License Agreement
Licensing agreements for stock index ETFs are complex contractual arrangements that involve various provisions, such as exclusivity, sublicensing, and termination rights. Most importantly, licensing agreements define the terms under which an issuer can use the index, including how the issuer can replicate and customize the index and market and promote the ETF using the index. Licensing agreements also specify the obligations and responsibilities of both parties, such as governance and compliance requirements.
License Fees
ETF index licensing fees are the fees paid by ETF providers to use the underlying index that tracks the performance of a specific sector or market. The index providers charge these fees to the ETF issuer for the right to use their index.
License fees for stock index ETFs can vary substantially, ranging from a few to dozens of basis points or more, typically resulting in the most significant portion of ETFs’ marginal costs. Index licensors typically charge a fee for using their index, calculated as a percentage of the ETF’s assets under management. Some licensors may require minimum fees, upfront payments, or annual guarantees.
Licensing is an Essential Part of ETF Marketing
Stock index ETF licensing can be essential to an ETF issuer’s strategy. By licensing an index from a reputable brand, an issuer can provide investors with a proven and recognizable investment solution. However, acquiring the licensing rights can be long and complicated, and the resulting fees can be substantial. Overall, licensing a stock index for an ETF requires careful consideration of the index and ETF type, negotiation and due diligence, and the terms and fees of the licensing agreement.
Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses of all sizes use licensing to turn their IP into income-producing products, services, and technologies. His decades of experience run the gamut from medical devices to food technology to consumer products. He’s licensed some of the biggest Hollywood entertainment blockbusters including the Batman Movies (1 and 2), and the number one kid’s action TV show, the Mighty Morphin Power Rangers. Rand speaks about licensing and is a featured speaker at investment conferences, trade shows, colleges, and startup events. His first book, Hidden Wealth: The Money Making Power of Licensing was released in 2019 and is available on Amazon.com. He’s also a published writer with articles appearing in several prestigious trade magazine including The Licensing Journal, Intellectual Property Magazine, and License India. Rand also mentors at the Cal State Fullerton School of Business and Economics and is a judge for their startup business plan competitions.