Is snp charging too much fees for indexing? [Standard-n-Poor index]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
vu8
Posts: 65
Joined: Tue May 29, 2018 10:15 am
Location: Columbus, Ohio

Is snp charging too much fees for indexing? [Standard-n-Poor index]

Post by vu8 » Thu Jan 10, 2019 6:38 pm

Hi there, I know that VOO and Vanguard 500 index fund have to pay a hefty fee for indexing with snp. Is this fee significantly more comparing to the crsp index and is this fee detrimental to the long term performance of the fund? How much fee is it and is it worthy to switch off of voo?

User avatar
TheTimeLord
Posts: 5424
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is snp charging too much fees for indexing?

Post by TheTimeLord » Thu Jan 10, 2019 6:39 pm

So glad I read your post or I would never known what snp was.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

User avatar
David Jay
Posts: 6018
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Is snp charging too much fees for indexing?

Post by David Jay » Fri Jan 11, 2019 1:16 pm

Yes, there is a fee to use the SP500 Index commercially. Since the Vanguard SP500 index fund (Admiral) has total expenses that are 0.0004 of assets (ER=.04%), I am certain that the fee is small and will not measurably affect your results.

A fund using any other index will result in different results because another index will have different components. Only a fund tracking the SP500 will give you the results of the SP500.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
David Jay
Posts: 6018
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Is snp charging too much fees for indexing?

Post by David Jay » Fri Jan 11, 2019 1:22 pm

To do the math, that is a total fund expense of 40 bucks per year per $100,000 invested.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Silk McCue
Posts: 1753
Joined: Thu Feb 25, 2016 7:11 pm

Re: Is snp charging too much fees for indexing?

Post by Silk McCue » Fri Jan 11, 2019 1:26 pm

vu8 wrote:
Thu Jan 10, 2019 6:38 pm
Hi there, I know that VOO and Vanguard 500 index fund have to pay a hefty fee for indexing with snp. Is this fee significantly more comparing to the crsp index and is this fee detrimental to the long term performance of the fund? How much fee is it and is it worthy to switch off of voo?
I'd be very interested to know why you believe that a high fee is charged for the use of S&P name (not snp BTW). What source provided you with this erroneous information?

Cheers

User avatar
jhfenton
Posts: 3693
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Is snp charging too much fees for indexing?

Post by jhfenton » Fri Jan 11, 2019 1:32 pm

TheTimeLord wrote:
Thu Jan 10, 2019 6:39 pm
So glad I read your post or I would never known what snp was.
I still don't know what snp is other than single nucleotide polymorphism. Google also suggested the Scottish National Party.

Edited: Ah. I'm slow today. I figured it out on a second reading and with the help of the other posts.

alex_686
Posts: 4191
Joined: Mon Feb 09, 2015 2:39 pm

Re: Is snp charging too much fees for indexing?

Post by alex_686 » Fri Jan 11, 2019 1:36 pm

To put this in a bit of context, Vanguard hired CRSP to create the indexes. The scuttlebutt was to put pressure on the S&P (not snp) to keep their fees low. It was one of the higher fixed expenses that Vanguard had.

User avatar
nisiprius
Advisory Board
Posts: 37334
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is snp charging too much fees for indexing?

Post by nisiprius » Fri Jan 11, 2019 1:42 pm

I usually write this as "S&P," for "Standard and Poor's," even though when people say "S and P" it does sound like "S 'n' P."

The easy answer is that if you have any doubts about S&P indexing, it is easy to find index funds from Vanguard and others that use other index providers.

And I can get a good enough answer to suit me by comparing the results of ETFs that track S&P indexes, versus other providers. Keeping in mind that the S&P 500 is not exactly the 500 largest-cap stocks--it is a selection of 500 "leading companies in leading industries"--it is still a large-cap index. So I choose to compare it to IWB, which is an iShares ETF that tracks the Russell 1000--a large-cap index from another famous provider, Russell--and VV, a Vanguard ETF which tracks the CRSP Large-Cap index. So we have three different index providers, and indexes that are not targeting exactly the same thing.

Source

Image

That's close enough for me.

If you extend the time backwards a little, some air does open up between them, and the S&P 500 is the lowest of the three, but not much; and while I don't know for sure, there are many possible reasons for this and I don't think it has anything to do with the licensing fees for the index.

The fee issue between Vanguard and S&P is a little fraught. Vanguard licensed the S&P 500 index at a very low price when they were young, and S&P probably thinks they got too good a deal. Later, when Vanguard invented a way to create ETFs as share classes of mutual funds, S&P wanted to charge two fees, one for the mutual fund and one for the ETF, and Vanguard objected to that. That's from press accounts, and actual numbers of dollars were not mentioned. So Vanguard's avoidance of S&P might have more to do with business dealings between the companies, than with S&P's fees being all that high.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Iridium
Posts: 312
Joined: Thu May 19, 2016 10:49 am

Re: Is snp charging too much fees for indexing?

Post by Iridium » Fri Jan 11, 2019 1:46 pm

You might find this article interesting: https://www.marketwatch.com/story/vangu ... 2001-09-05

The expense ratio of the fund will include the fee to the index provider, so if the ER on the fund is reasonable, then it is not a bad fund. That being said, Vanguard has been trying to shave every possible basis point of expenses, so it is not surprising that they have shifted to an index provider much more dependent on Vanguard as doing so maximizes Vanguard fund negotiating leverage. At this point, Vanguard's reputation in indexing is at least as strong as S&P's, so Vanguard really doesn't need the boost of offering THE S&P 500, when they can simply say they offer the Vanguard Large Cap and still pull in massive amounts of money.

User avatar
nisiprius
Advisory Board
Posts: 37334
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is snp charging too much fees for indexing?

Post by nisiprius » Fri Jan 11, 2019 1:47 pm

P.S. vu8, If someone is suggesting that you should use some other index fund because of the supposed high cost of the S&P index, that is at least logical, though questionable if the person saying it can't tell you how much that is in dollars.

However, I suspect that someone is suggesting that you shouldn't use index funds at all because of supposedly high fees charged by S&P. A common talking point against indexing itself is to attack the S&P 500 index for various technical reasons.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
vu8
Posts: 65
Joined: Tue May 29, 2018 10:15 am
Location: Columbus, Ohio

Re: Is snp charging too much fees for indexing?

Post by vu8 » Fri Jan 11, 2019 2:59 pm

nisiprius wrote:
Fri Jan 11, 2019 1:47 pm
P.S. vu8, If someone is suggesting that you should use some other index fund because of the supposed high cost of the S&P index, that is at least logical, though questionable if the person saying it can't tell you how much that is in dollars.

However, I suspect that someone is suggesting that you shouldn't use index funds at all because of supposedly high fees charged by S&P. A common talking point against indexing itself is to attack the S&P 500 index for various technical reasons.
Good question. I use VOO and VXF, and switched to VTSAX and VTMGX when I realized that VTSAX have lower expense ratios. John Bogle himself said in the podcast with Mr. Ferri that he pointed out that "S&P charges outrageous fees", that's why I was worrying about the fact that they could skyrocket their licensing fees and therefore jeopardize VOO's returns.

fennewaldaj
Posts: 488
Joined: Sun Oct 22, 2017 11:30 pm

Re: Is snp charging too much fees for indexing?

Post by fennewaldaj » Fri Jan 11, 2019 11:55 pm

My guess is that it can't be too high. My wife's 401k has pricipal separate accounts for the S&P 400 and S&P 600 with ERs of 0.05. Now principal is hardly a big actor in the indexing world and I am sure they are making money on these products so logically the price must be somewhat reasonable. I suppose it is possible that S&P charges less to use the 400 and 600 since they are much less known than the 500.

jbranx
Posts: 279
Joined: Thu Feb 09, 2017 6:57 pm

Re: Is snp charging too much fees for indexing?

Post by jbranx » Sat Jan 12, 2019 12:50 am

This is solely from memory from the Vanguard/S&P suit and other info that has dribbled out over the decades, so with that caveat about faulty memory, pretty sure for the first couple decades Vanguard and all others paid about $10,000 per year for an S&P 500 index fund regardless of asset size. In the nineties that began to change, with S&P charging about 3 basis points to the first S&P ETF, the SPDR (SPY). I think that is still the fee, with similar fees for other index series and probably about the same for Ishares.

S&P execs apparently thought index funds would drive more futures and options trading in Chicago, and they were making more money on pit trading than they could from indexing early on. Don't recall the exact year, but it took a couple decades for Vanguard's first fund to reach a billion dollars. I'm not sure how much Vanguard pays for the open end fund vs. the ETFs today or if the amount is close to what State Street and Blackrock pay.

The Select Sector Spdrs funds pay four basis points I think I recall seeing once, which is likely the highest price any licensee pays. All said and done, it's not an egregious fee structure given what asset managers have traditionally charged for far less performance. My impression is that MSCI, FTSE and the other providers today charge about the same whenever they can.

Needless to say, the index creation and maintenance business went from a basically non-paying, lowly data selling business circa 1926 to 1957 to some piddling fees in the seventies and to today an absolute bonanza for S&P that likely rivals the margins on bond ratings.

User avatar
sleepysurf
Posts: 197
Joined: Sat Nov 23, 2013 6:59 am
Location: Florida

Re: Is snp charging too much fees for indexing?

Post by sleepysurf » Sat Jan 12, 2019 8:51 am

I suspect Vanguard could threaten to create their own in-house Indices (as Fidelity now does for their Zero-Fee offerings) if they felt the current S&P, CRSP, etc. licensing fees got too high. I hope they leverage that fact if/when negotiating what they pay!
Retired 2018 | ~50/45/5 (partially sliced and diced)

User avatar
nisiprius
Advisory Board
Posts: 37334
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is snp charging too much fees for indexing?

Post by nisiprius » Sat Jan 12, 2019 9:35 am

Vanguard more or less did create their own indexes circa 2001 or so, when they began to use MSCI indexes. At the time Vanguard said some of them were "jointly developed" with MSCI, and many of the indexes Vanguard was using were not used by any other index funds. I don't know any more about it than that.

The S&P 500, however, is a special case, because the exact list of stocks in the index is a committee choice of "leading companies in leading industries." If someone wanted to clone the index, and use it without paying S&P, I am sure it would raise fascinating legal issues. I've long noticed that Vanguard calls its VOO ETF the "Vanguard S&P 500 ETF," but calls the VFINX mutual fund merely "Vanguard 500 Index Fund" (not "Vanguard S&P 500 Index Fund.") I've always imagined that was to give themselves some wiggle room, and a tacit warning to S&P: "if you get too tough, we could always create our own index of 500 stocks."

An interesting question is whether another company could duplicate the exact list of (the 505!) stocks in the S&P 500. Would they need to change it at all, or could they do it as long as they didn't call it "the S&P 500." Could they use nudge-nudge wink-wink descriptions like "this is our improved version of a poor standard?"
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
vu8
Posts: 65
Joined: Tue May 29, 2018 10:15 am
Location: Columbus, Ohio

Re: Is snp charging too much fees for indexing?

Post by vu8 » Sat Jan 12, 2019 12:59 pm

jbranx wrote:
Sat Jan 12, 2019 12:50 am
This is solely from memory from the Vanguard/S&P suit and other info that has dribbled out over the decades, so with that caveat about faulty memory, pretty sure for the first couple decades Vanguard and all others paid about $10,000 per year for an S&P 500 index fund regardless of asset size. In the nineties that began to change, with S&P charging about 3 basis points to the first S&P ETF, the SPDR (SPY). I think that is still the fee, with similar fees for other index series and probably about the same for Ishares.

S&P execs apparently thought index funds would drive more futures and options trading in Chicago, and they were making more money on pit trading than they could from indexing early on. Don't recall the exact year, but it took a couple decades for Vanguard's first fund to reach a billion dollars. I'm not sure how much Vanguard pays for the open end fund vs. the ETFs today or if the amount is close to what State Street and Blackrock pay.

The Select Sector Spdrs funds pay four basis points I think I recall seeing once, which is likely the highest price any licensee pays. All said and done, it's not an egregious fee structure given what asset managers have traditionally charged for far less performance. My impression is that MSCI, FTSE and the other providers today charge about the same whenever they can.

Needless to say, the index creation and maintenance business went from a basically non-paying, lowly data selling business circa 1926 to 1957 to some piddling fees in the seventies and to today an absolute bonanza for S&P that likely rivals the margins on bond ratings.
So you are giving out absolutely some valuable information! Let's say if VOO is being charged 3 basis point for indexing with S&P 500, it means that currently, 75% of its expense ratio (4 basis point) goes to paying this licensing fee to Standard & Poor!!! It means that without paying this egregious licensing fee, the expense ratio of the VOO will plunge to 1 basis point, to people who invest in millions, this is a significant amount of money saved from giving to Standard and Poor!

User avatar
TheTimeLord
Posts: 5424
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is snp charging too much fees for indexing?

Post by TheTimeLord » Sat Jan 12, 2019 1:18 pm

vu8 wrote:
Sat Jan 12, 2019 12:59 pm
jbranx wrote:
Sat Jan 12, 2019 12:50 am
This is solely from memory from the Vanguard/S&P suit and other info that has dribbled out over the decades, so with that caveat about faulty memory, pretty sure for the first couple decades Vanguard and all others paid about $10,000 per year for an S&P 500 index fund regardless of asset size. In the nineties that began to change, with S&P charging about 3 basis points to the first S&P ETF, the SPDR (SPY). I think that is still the fee, with similar fees for other index series and probably about the same for Ishares.

S&P execs apparently thought index funds would drive more futures and options trading in Chicago, and they were making more money on pit trading than they could from indexing early on. Don't recall the exact year, but it took a couple decades for Vanguard's first fund to reach a billion dollars. I'm not sure how much Vanguard pays for the open end fund vs. the ETFs today or if the amount is close to what State Street and Blackrock pay.

The Select Sector Spdrs funds pay four basis points I think I recall seeing once, which is likely the highest price any licensee pays. All said and done, it's not an egregious fee structure given what asset managers have traditionally charged for far less performance. My impression is that MSCI, FTSE and the other providers today charge about the same whenever they can.

Needless to say, the index creation and maintenance business went from a basically non-paying, lowly data selling business circa 1926 to 1957 to some piddling fees in the seventies and to today an absolute bonanza for S&P that likely rivals the margins on bond ratings.
So you are giving out absolutely some valuable information! Let's say if VOO is being charged 3 basis point for indexing with S&P 500, it means that currently, 75% of its expense ratio (4 basis point) goes to paying this licensing fee to Standard & Poor!!! It means that without paying this egregious licensing fee, the expense ratio of the VOO will plunge to 1 basis point, to people who invest in millions, this is a significant amount of money saved from giving to Standard and Poor!
There is no such thing as plunging from 4 basis point to 1 basis point. Just as there is no such thing as plunging from 6 inches. 1 percent of $1 million is $10,000 but 1 basis point is just $100. You are not going to convince me that $3,000 is a significant amount of money to someone with a $10 million portfolio invested in an S&P 500 index fund. Having said all that I believe you will be interested in this article. https://www.fool.com/investing/2017/06/ ... s-mak.aspx

This might also be of interest.
https://www.etf.com/sections/features/3 ... nopaging=1
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

Topic Author
vu8
Posts: 65
Joined: Tue May 29, 2018 10:15 am
Location: Columbus, Ohio

Re: Is snp charging too much fees for indexing?

Post by vu8 » Sat Jan 12, 2019 2:44 pm

TheTimeLord wrote:
Sat Jan 12, 2019 1:18 pm
vu8 wrote:
Sat Jan 12, 2019 12:59 pm
jbranx wrote:
Sat Jan 12, 2019 12:50 am
This is solely from memory from the Vanguard/S&P suit and other info that has dribbled out over the decades, so with that caveat about faulty memory, pretty sure for the first couple decades Vanguard and all others paid about $10,000 per year for an S&P 500 index fund regardless of asset size. In the nineties that began to change, with S&P charging about 3 basis points to the first S&P ETF, the SPDR (SPY). I think that is still the fee, with similar fees for other index series and probably about the same for Ishares.

S&P execs apparently thought index funds would drive more futures and options trading in Chicago, and they were making more money on pit trading than they could from indexing early on. Don't recall the exact year, but it took a couple decades for Vanguard's first fund to reach a billion dollars. I'm not sure how much Vanguard pays for the open end fund vs. the ETFs today or if the amount is close to what State Street and Blackrock pay.

The Select Sector Spdrs funds pay four basis points I think I recall seeing once, which is likely the highest price any licensee pays. All said and done, it's not an egregious fee structure given what asset managers have traditionally charged for far less performance. My impression is that MSCI, FTSE and the other providers today charge about the same whenever they can.

Needless to say, the index creation and maintenance business went from a basically non-paying, lowly data selling business circa 1926 to 1957 to some piddling fees in the seventies and to today an absolute bonanza for S&P that likely rivals the margins on bond ratings.
So you are giving out absolutely some valuable information! Let's say if VOO is being charged 3 basis point for indexing with S&P 500, it means that currently, 75% of its expense ratio (4 basis point) goes to paying this licensing fee to Standard & Poor!!! It means that without paying this egregious licensing fee, the expense ratio of the VOO will plunge to 1 basis point, to people who invest in millions, this is a significant amount of money saved from giving to Standard and Poor!
There is no such thing as plunging from 4 basis point to 1 basis point. Just as there is no such thing as plunging from 6 inches. 1 percent of $1 million is $10,000 but 1 basis point is just $100. You are not going to convince me that $3,000 is a significant amount of money to someone with a $10 million portfolio invested in an S&P 500 index fund. Having said all that I believe you will be interested in this article. https://www.fool.com/investing/2017/06/ ... s-mak.aspx

This might also be of interest.
https://www.etf.com/sections/features/3 ... nopaging=1
These are great articles. Basically, the VAST MAJORITY of VOO's expenses go toward S&P instead of the management itself. So then, how is it that VFIAX has the same expense ratio with VOO at 4 basis points? Is VFIAX investors sharing a portion of the VOO's S&P licensing expense with VOO investors?

Geologist
Posts: 1221
Joined: Fri Jan 02, 2009 7:35 pm

Re: Is snp charging too much fees for indexing?

Post by Geologist » Sat Jan 12, 2019 5:02 pm

Perhaps you should read the annual or semi-annual report of funds you are talking about to learn more about their expenses.

I don’t see how it is possible that 75% of the expenses of VFIAX or VOO go to S&P. [VOO and VFIAX are just different classes in the same fund... and there are other share classes.]

According to the semi-annual report from June 30, 2018 (the most recent report), management and administrative expenses related to share classes (Investor, Admiral, ETF [this is your VOO], Institutional Select) amount to about $67,300,000 of the total $87,710,000 expenses of the fund in the six months ended June 30. These are expenses related solely to maintenance of shareholder accounts (this has nothing to do with S&P). That covers 76% of the expenses of the fund.

I suppose it is possible the marketing and distribution expenses, which are also divided among share classes, could include the S&P licensing fee, although it seems dubious to me. Even if it does, there are other costs (e.g., advertising) included in this. This is another 12.9% of the expenses of the fund, so if the S&P fee is here, it is less than 12.9%.

I think it likely that the S&P fee is included in the Investment Advisory Services expense whose total is $5,840,000 (or 6.6% of total expense) and this includes costs other than the S&P fee.

It is therefore unlikely the S&P licensing fee is even 10% of the cost of running VFIAX/VOO and the other share classes.

Post Reply