State Street's legendary SPY has proved a veritable money tree for its index provider S&P Global.
SPY currently manages a $253.8bn asset mountain, of which 3 basis points go to S&P in index fees. State Street also forks out an additional $600,000 in yearly license fees for the right to track the S&P 500, according to SPY's prospectus.
The fees and SPY's massive asset base mean S&P Global takes roughly $84 million in revenue from SPY. S&P Global then sells its index to State's Street's rivals at a cheaper price (Vanguard only pays one basis point on VOO, to judge by its prospectus). Meaning that State Street doesn't get much exclusivity and has competitors able to underprice it.
But loudening mutterings suggest State Street is tiring of this type of arrangement, which was first etched in 1993 when the ETF industry was young. And signals suggest the company will build its own indexes going forward, if and when applying muscle fails to drive down fees.
"In any relationship there are commercial arrangements that you work through and change over time," said Jim Ross, boss of State Street's ETF division, at an event in Sydney on Tuesday.
"We have long-term relationships with many [index] providers and we have strong conversations on commercial terms all the time... there are always going to be different arrangements that look unique over time."
The first warning shot rang when State Street self-indexed its gender diversity ETF SHE in 2016. The company has since broadened its catalogue of DIY indexes and ditched FTSE Russell on a bevy of funds. Ditching FTSE was accompanied by fee drops as great as 48 basis points in some instances, some of the largest ever.
Crucially, the self-indexing freed State Street's arms to wrestle with BlackRock, Vanguard and, increasingly, Charles Schwab -- all of which have shaved slices off the company's market share via underpricing.
"There have been cases where we use self-index capabilities and we do have Chinese walls within those capabilities," said Mr Ross.
"In order to produce self-indexing in the US, you have a group that does the index which is separate and can't see that information any time before anyone else. That's why you see index announcements which we do now."
And State Street is not the only big player building its own indexes. BlackRock and Schwab are both self-indexing at an increasing rate while other ETF providers, like Goldman Sachs and Lyxor, have taken to cheap alternative index providers (like Solactive and Morningstar) who charge flat fees rather than a share of assets managed.
Speaking at the same event, David Blitzer, a partner at S&P Global and the primary gatekeeper of the S&P 500, said that fees were low and competition would ensure that they remain so.
"Our fees are very low," Dr Blitzer said.
"I think that index providers play a huge role in the success of the ETF. There are times where our interest may not be aligned ... [but] we both bring stuff to the party.
"When you get into self-indexing, which is some guys answer to a fee, there is potential for conflicts. There's potential that a big organisation has incentive to add stocks to an index that they've got too many of. All kinds of questions come up.
"There's healthy competition between the three major global index providers‚Ä¶ we do compete and we do haggle."
Last year, ETF issuers raised discussion of creating some sort of industry body that centralises index production. While such a move could reduce the bargaining power of index providers, the specifics were never fleshed out and no capital was committed to the project.
Some believe that such talk is meant mostly as a stalking horse to scare index houses.