In April 2005, Vanguard patented exchange traded funds (ETFs) as share classes of existing index funds. The move is proving to have been a stroke of genius.

As ETFs have grown in number and increased in their popularity among financial advisors, the patent has been given more relevance, says Kevin Burke for Ignites. It prevents rival shops from launching similar funds without permission.

The patent makes it a challenge for providers who want to roll out a similar fund, because they have to start from scratch instead of piggybacking on one that’s already been established. It was a shrewd move by a fund company that only entered the ETF business grudgingly, because the growth of ETFs was threatening to take market share from its index funds.

Some analysts are questioning how long Vanguard’s patent will prevent imitators from doing something similar, though. Patent litigation attorneys note that patents in the financial services industry are all over the place, and the punishment isn’t as severe as it once was.

To date, no one has challenged Vanguard’s patent, but as demand for ETFs increase, some may find it hard to resist the temptation to copy the Vanguard blueprint.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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