I read that ETFs pay a higher licensing fee to S&P. Could someone please explain why this fee is paid to S&P? Is not the S&P index freely replicable? Who owns the S&P Index?
Also, why does a Mutual Fund pay a lesser licensing fee to S&P?
Thanks in advance.
To answer your first question, the short answer is no, the index is not free to replicate, technically. The ETF provider will be charged a licensing fee from Standard and Poor’s, the owner, of the S&P 500 index. This licensing fee essentially is the fee paid in order to receive the data from S&P to replicate the index on an on-going basis. Also, the cost to manage the index is not free either, you have trading costs, software costs, back office costs, etc.
I am unsure as to why a mutual fund would have a lower licensing fee, could be the way it is structured, but I don’t know.
Am I write to say that S&P only manages the index theoretically in the system, not actually invest their money?
Thanks for your answer. Looking forward to more contributions.
This has come up on this forum before. I was never able to find evidence that ETF Index licensing fees are lower higher than mutual funds, or if indeed they actually are, why they are. I get the feeling that it was the position/opinion/understanding of the author of one of the various 3rd party study materials that are available out there and it was included in the study notes. No clue. Where did you read this? (my money is on Schweser)
For the Index itself, the creators of the Index own the rights to it. They incur the costs of creating and managing the Index (which can be significant), rebalancing and reconstituting it when necessary based on its mandate, and reporting data on it. To be compensated for its efforts, Index providers license out the right to replicate it to asset managers. It’s a profit center for Index creators, and as such it can be a very competitive business. Several years back Vanguard dropped MSCI for many of its funds in favor of FTSE and CRSP in order to reduce costs and MSCI’s shares tanked.
Just got off the phone with the S&P and they said it varies depending on relationship and size of the funds.
But if you take out the SPDR ETF, the top funds in size are mostly mutual funds. So I guess if you are comparing the top 10 largest mutual funds vs top 10 ETF, mutual funds would be cheaper.
I stand corrected (and I also had the cost of ETF vs fund licensing fees backwards in my post above). The statement that ETFs pay higher index license fees than conventional funds is indeed stated in the curriculum (page 178 of Reading 23). The size criteria makes some sense, so that’s probably the primary factor. ETFs are getting bigger and bigger though. I’d imagine the average licensing cost differences between ETFs and mutual funds have been shrinking over the past several years.