ETF Folly: Patents Covering ETF Methodology

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24/7 Wall St. is taking a look at key exchange-traded fund (ETF) features each and every day to help investors and the public navigate through issues around their personal finances. It has been said often that there is an ETF strategy for just about every sector or investing style. Our number one mantra for investing is that you must fully understand what you are investing in. So what about patents inside ETF methodologies? The ETF market is getting so competitive that investment management firms are looking for ways to protect their position and market share.

The Bank of New York Mellon Corp. (NYSE: BK) released news this morning showing that it has been awarded three patents for key processes that enable electronic trading of commodities such as gold through ETFs. The patents also cover silver and other precious metals, as well as base and industrial metals.

The company shows that it launched this unique process back in 2003. Bank of New York Mellon claims to have created the commodities ETF business, and it said that now consists of nearly $100 billion in commodity assets administered. The organization also serves as custodian, record keeper or administrator for approximately half of all U.S. listed ETFs across a broad range of asset classes.

So here is the question to ask: Is the bank going to now outline competing ETFs that may be in patent violations? We would also want to know if these patents are enforceable and whether the bank wants to go after other ETFs.

There is a lot of money at stake here, and it is not surprising that a company would want to protect some proprietary things if and when it can. As of December 31, 2012, Bank of New York Mellon had a whopping sum of $26.2 trillion in assets under custody and/or administration. It also had $1.4 trillion in assets under management.

We will be looking into this matter much closer because, ultimately, this is the sort of odd financial news that needs to be watched closely. ETFs have more than $1 trillion in assets now, and they account for a large portion of the average daily volume on direct trading in ETF share volume each day. More importantly, these ETFs also are responsible for much of the daily trading volume in the stocks and financial instruments that they have to include to replicate their investment strategy.

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