Standard & Poor's Sues Vanguard By IndexFunds.com Staff June 9, 2000

Two indexing heavyweights are sparring over the use of indexes by exchange-traded funds. Standard & Poor's parent company McGraw-Hill sued Vanguard Group June 8th over the use of its flagship S&P 500 Index.

The dispute is being closely watched by many index fund firms who have ETFs in the planning stages. A victory by Standard & Poor's could slow down and add cost to S&P 500-based ETFs, while a victory by Vanguard could open the gates to a flood of new ETF products.

Standard & Poor's maintains in the suit that it had granted Vanguard licensing rights for a mutual fund based on the S&P 500, the giant Vanguard S&P 500 fund, but not to an ETF. S&P views the ETF as a separate fund that requires separate licensing fees. Kenneth Vittor, general counsel at McGraw-Hill, stressed that the issue is one of "control over intellectual property".

Vanguard counters that it will simply be distributing the same fund in a different manner. Exchange-traded funds may be bought and sold instantly with brokers, while mutual funds trade at the closing price at the end of each day. Both may hold the same stocks and be managed in the same manner.