exchange traded funds (etfs) are popular consumer investment products and make up a $5 trillion industry. etfs can hold various assets and trade on exchanges like stocks. state street corporation invented them in 1993. what happened afterward is a valuable lesson in how trademark mistakes can lead to serious competitive loss. importantly, it also lets me show a spider—a nethercreation widely feared and having intelligence and communication skills on par with cuttlefish or velociraptor.
in 1993, state street made most of its money in products like trust banking and institutional asset management. state street didn’t know how successful etfs would be, and didn’t put a lot of thought into its branding and trademarking. so, it introduced its etfs under various brand names.
but, the brand name for what turned out to be state street’s most successful product—the spdr (pronounced “spider”)—actually originated from standard & poors (s&p). in fact, spdr is an acronym for standard & poor’s depository receipts. s&p trademarked the spdr name at the united states patent and trademark office (uspto) and then licensed it to state street as etfs rolled out. the license fee amounted to one-third of the fee amount paid by spdr consumer-investors. state street was first to market with its unique invention, and despite hefty licensing fees to s&p, state street dominated the etf market for more than a decade.
then, serious competitors barclays and vanguard entered the scene. barclays offered dozens of etfs under its trademarked ishares brand, and pushed forward with serious marketing effort. vanguard entered with its already recognized, heavyweight consumer brand name. both of these competitors quickly gained market share through uniform branding, trademark protection, savvy marketing, and low pricing.
state street now pays $143 million a year to s&p in trademark licensing fees for its popular spdr etf. these payments make it very difficult to compete with lower priced competitors. consequently, state street has lost 32% of total market share over the last 15 years.
it is now reported that state street is attempting to pivot by marketing a new etf lineup under its own brand. although the new brand is not specified, some informal research/guesswork indicates that it could be portfolio etfs. if that is the case, state street's road could continue to be rocky as its federal trademark application before the uspto is currently being rejected as merely descriptive.
in any event, the state street story is a valuable lesson in the importance of proper and early trademark evaluation and protection.
post synthesized from the $5 trillion question: how did the firm that pioneered etfs lose its lead?, the wall street journal, july 27, 2019.