[gomox]

I find your comment fascinating but even though I think I understand perfectly what an index fund is, I don't quite understand what it is that S&P sells for so much money.

Could you clarify this for me? I.e. who buys from you, and what is it they buy?

[jkulubya]

I think the comment is referring to the canonical list of the constituent securities of an index such as the S&P 500 or DJIA. You pay license fees to S&P to name any fund you create “S&P XYZ Fund”.

I suspect you could legally create a fund with the constituents of the S&P 500 without paying them, but you wouldn’t be able to advertise that fact easily.

[turc1656]

You would not be able to legally recreate the 500 and just not use the name. We once had a problem within our Custom division (where clients retain the IP but pay us to do everything for them) and one client basically created something that was substantially similar in rules/methodology to another client's product and one client sued the other. Our employees were called to present testimony in court but it was settled before it got that far, presumably because the offending client realized they were going to get hammered.

[jkulubya]

I’ve read your other comments in this thread and I mostly follow and agree. I’m getting lost on this one though.

How does this monopoly(?) on the 500 work? Aren’t I able to go out tomorrow and buy the different input securities of an index, and market that as “jkulubya’s awesome fund wink wink”? (Easier said than done)

One wrinkle I see with this scheme is that I probably have to publish my own index value because yours is your ip.

[turc1656]

Think of the 500 (or any index strategy) as being like a story and the methodology is like the book that tells the story. You can't rip off our story and write your own book that essentially plagiarizes the 500 and claim it as your own. If you were to, for example, write a story about a rich kid who's parents were murdered and when he grew up he became a vigilante who wore a disguise to conceal his identity and worked with the chief of police to fight corruption in his city, I have a feeling you might get sued. This happens in the movie industry from time to time. That's why script readers are exceedingly careful on what they read because there have been a number of cases where someone submits a story which then gets passed along but eventually passed-on and then a while later the studio ends up making a movie written by someone else who submitted a scrip with similar story elements and the studio gets sued by the first writer claiming they ripped them off and just paid someone else to rewrite their story. Sometimes it's true, sometimes it's not.

The reason this same legal principal applies to index products is because it's surprisingly difficult to even match an index's composition and weighting even with the methodology document in hand. So the odds of you creating your own strategy and that just so happens to be damn near identical to another index is essentially impossible. So just like the entertainment businesses, they look at it on a case by case basis and examine whether or not the "spirit" of the strategy has been violated or it's creative elements have been stolen. It's done case by case because it can get pretty nuanced and subjective just like music, books, and films.

[jkulubya]

Thanks for this

[turc1656]

jkulubya's comment is largely correct. And you most likely do understand what an index fund is. It's just that most people don't realize there are two sides to the product - the theoretical and the real. The index is a theoretical product (intellectual property). The fund is the real-world implementation. A fund manager takes a look at one of our S&P products and says "I want to make a fund off this" and S&P contracts a license with them to allow it since S&P owns the IP on that index - it is S&P's design and methodology.

An easy way to think of this is the retail example where you pay an investment advisor. You pay them to manage your money but they place all the trades through some broker. S&P is the investment advisor and the fund manager is the broker.

[gomox]

Very interesting. I always assumed that the SP500 index composition was some sort of loss leader for SP where the brand awareness created by the SP500 name served as proof of legitimacy for some other service.

Never thought the index composition could be a cash cow in itself. Im intrigued at how the IP is protected, in legal terms (i.e. what exactly is copyrighted or patented or trademarked or trade secrets), if you are able to comment on that aspect?

[turc1656]

I think my other comment to someone else in this thread addresses most of what you are asking: https://news.ycombinator.com/item?id=18572584

Anything deeper would require an actual lawyer to weigh in.

[mruts]

The S&P 500, along with a lot of their other products are proprietary and not easily reproducible. S&P doesn’t publish how it generates its indices, so they can charge a lot of money.

Would it be that hard to generate an index that had similiar exposure as an S&P index? Maybe not, but S&P is good at what they do and they have a lot of brand recognition.

[turc1656]

This isn't exactly accurate. One of the requirements for publicly traded funds (ETFs) is that they need to be "replicable", meaning that anyone should be able to read the methodologies (which are required to be public) and understand it and be able to come to the same final basket of securities at the same weights.

This, in practice, is very difficult even with everything public, though, due to a variety of differences such as data differences between vendors, "expert judgment" for unforeseen circumstances, and the mere fact that sometimes methodologies can be confusing, complex, or have vague language. Most indices, unlike the 500, are pretty hard on rules. The 500 is a rare index that is purely discretionary. They do give guidance on general guidelines, though.