Intellectual ETF Heavyweights In Fundamental Battle

Exchange-traded fund start-up WisdomTree Investments has some great minds on its staff. But did it use someone else’s without his permission?

Robert Arnott, who heads Pasadena, Calif.-based Research Affiliates, loves the 20 new “fundamentally-weighted” ETFs the New York-based firm launched on the New York Stock Exchange on June 16. “I think what they have done is a great idea,” he told Investment News, “but I also think it is my idea.”

The problem is that Arnott created a proprietary system for weighting indices called fundamental weighting last year. His fundamentally-weighted indices seek to accurately reflect constituent companies’ economic “footprint,” measured using book value, employment, cash flow, revenue, sales and dividends. The WisdomTree funds are weighted by dividends and dividend yield, which Arnott alleges is an infringement of his intellectual-property rights.

WisdomTree, in an e-mail to IN, denied any wrongdoing, calling itself “the sole creator and owner of all intellectual-property rights in its unique index methodology,” adding that “any assertion to the contrary is without merit.”

Fighting words, indeed, but Arnott, whose fundamental indexing is available through PowerShares CapitalManagement’s $119 million FTSE RAFI US 1000 Portfolio, doesn’t think a court date is likely. “I see every reason to say that we will be able to work with them,” he told IN. “There is only a slight risk that there will be problems.”