A small but growing number of fund managers are finding that patenting an index strategy can have strategic and marketing advantages.

WisdomTree and Research Affiliates are the only two fund companies that have thus far successfully patented index strategies, but other ETF players are now focused on protecting their platforms. Todd Rosenbluth, director of ETF & Mutual Fund Research at S& P Capital IQ, says ETF players like WisdomTree have gone the patent route for their index strategies not just for marketing to advisors and investors, but also as a preemptive strike against competitors who may try to jump in.

"If it is effective the others will want to piggy back off it and by patenting it they can't," says Rosenbluth. "The longevity of the strategy is going to be strengthened since others aren't able to replicate it without permission."


Research Affiliates first filed a patent application for the RAFI Fundamental Index in February 2004 and got its first approval in November 2009. Mike Bowers, senior vice president for marketing and strategy at Research Affiliates, says a major part of the initial patent process involves having product specialists educating examiners at the U.S. Patent Office about why a particular index strategy is unique. He adds, however, that once the first approval comes in other applications gets expedited and that the process is worth it from a marketing and "credibility" perspective when it comes to working with other asset managers who are interested in licensing their methodology.

"[Other asset managers] need to know what is being licensed from us is protected," says Bowers. "It is important to protect some of these index strategies from a brand perspective and not just a legal perspective."

One asset manager now going through the patent process is Compass EMP Funds. The Brentwood, Tenn.-based firm filed an application with the U.S. Patent Office in 2012 for its CEMP Volatility Weighted Index and CIO Steve Hammers expects the total process to be around three to seven years. He says while the application process can cost hundreds of thousands of dollars, the undertaking will be well worth it.

"Once you file for a patent nobody can really replicate it from that period forward," says Hammers. "You can really become a leader in the industry if you patent your indexes."

WisdomTree filed paperwork with the U.S. Patent Office in 2004 for its dividend-weighed equity markets index methodology and got approval eight years later. WisdomTree has launched 30 ETFs for its dividend-weighted strategy since 2006.

"We felt that what we were doing was innovative and we wanted to protect it as much as we could," says Luciano Siracusano, chief investment strategist at WisdomTree. "In the ETF industry as a whole a lot of the ways you succeed is being first to the market."


Dan Sondhelm, a vice president and marketing consultant at SunStar Strategic, says asset managers who successfully patent their strategies can capitalize with advisors and investors by distinguishing themselves from the competition. He urges firms who get patent approval in the coming years to include that information as part of an overall communications strategy in white papers, media pitches and on their websites.

"Having a patent can be a differentiator," says Sondhelm, who works with 40 asset managers on distribution and marketing strategies. "It shows your strategy has uniqueness, because you developed a new or useful process that earned a patent."

Aniket Ullal, founder and CEO of institutional ETF research provider First Bridge Data, says the ETF industry has reached a stage now where advisors and investors look beyond well-known indexes making a successfully patented strategy that much more important. He emphasizes, however, that the patent needs to be combined with an adequate marketing strategy focused on education through conferences, white papers and webinars.

"Patenting is one arrow in the marketing quiver, and can be a useful way to demonstrate thought leadership," says Ullal. "A patent-based strategy in isolation is insufficient, but in combination with these other approaches it can be effective."

Another ETF manager seeking to patent one of its indexes is New York-based Exceed Investments. Exceed CEO Joseph Halpern filed a patent applications last year for certain elements of the firm's defined-outcome indexes based on structured investing strategies that is being co-branded with NASDAQ and is expecting the process to last in the range of four to eight years. He says the patent process is important since it shows the investing public that they are ahead of the curve when creating strategies.

"It shows we are adding value," says Halpern. "It shows we did something different."


While the concept of patenting indexes is slowly catching on in the U.S. the concept has still not permeated the European asset management industry. However, Kieran Fox, director of business development for the Irish Funds Industry Association, says he recently encountered two asset managers in Europe who discussed the possibility of pursuing an index strategy patent and that there is potential for more fund companies across the pond eyeing this strategy.

"I wouldn't be surprised if it continues to gain interest in Europe, particularly if it becomes popular in the U.S.," says Fox. "There are benefits to it in terms of innovation."

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