Court Rebuffs Vanguard's Bid to Launch ETFs Tracking S&P 500

The U.S. District Court Wednesday ruled against Vanguard in a licensing dispute over the index-fund titan's planned rollout of exchange-traded funds tracking popular Standard & Poor's indices, according to a release from McGraw-Hill, S&P's parent company. The decision effectively stalls Vanguard's push into a lucrative slice of the mutual fund world and, if it holds, will make Vanguard's ETFs either more expensive for investors or less profitable for the fund firm.

A U.S. District Court judge in Manhattan sided with S&P, issuing a permanent injunction barring Vanguard from launching its products. McGraw-Hill filed the suit against Vanguard in June 2000, one month after the nation's second-largest fund firm announced plans to launch exchange-traded shares, called Vanguard Index Participation Equity Receipts or Vipers. The suit alleged that Vanguard's use of S&P's stock indices in the planned exchange-traded funds or ETFs, including the S&P 500, isn't covered by the licensing agreement the two firms signed back in 1985.

For its part, Vanguard refuted the suit, arguing that the new ETFs were new share classes of its traditional open-end funds, like the $85.5 billion (VFINX Quote)Vanguard 500 Index fund, already covered by the existing agreement. The Valley Forge, Pa.-based firm originally planned to roll out the new shares in last year's third quarter and if a new agreement isn't hashed out soon, the legal action will continue to hinder Vanguard's efforts to establish a beachhead in a potentially lucrative market, where low costs are key. ...