Vanguard Files for ETF Share Class Approval

Vanguard, long above the dual share class fray, has officially joined it.

On Wednesday night, it filed for exemptive relief to offer an ETF share class of its legacy active mutual funds. The move makes Vanguard — previously the only company allowed to provide dual share class ETFs — the latest to file. (Vanguard uses dual share classes for its passive index funds, but this would bring the structure to actively managed funds.)

The move marks an important milestone in the push for dual share class approval more broadly, since Vanguard, up until this point, has adopted a “wait-and-see” approach toward the possibility of broader SEC approval, said Jeff DeMaso, author of The Independent Vanguard Adviser newsletter. “Vanguard was waiting to see positive signs from the SEC before going through the paperwork and application process,” DeMaso said. “Now that they’ve seen those positive signs, they don’t want to miss this boat.”

Vanguard held an exclusive patent on ETF share classes of mutual funds until 2023, and the SEC allowed it to offer such classes only for index funds.

About Time

Prior to Vanguard’s patent expiring, only one fund company, VanEck, had filed for similar exemptive relief from the federal Investment Company Act of 1940 to offer such classes — a filing that was never addressed by the SEC. Now that roughly 60 fund companies have applied for the relief, however — with the Trump administration’s SEC signaling support for their approval — the applications are widely expected to be waved through this summer. What Vanguard may find particularly appealing about the structure, DeMaso said, is that investors will have more control over the timing of realizing portfolio gains because capital gains distributions aren’t required with trading activity like they are for mutual funds.

• Vanguard currently has more than 70 funds with $2 trillion in assets under management that make use of the ETF share classes.
• Vanguard also has $3.2 trillion in ETF assets, and seven actively managed fixed-income ETFs in the US, with the latest launched earlier this month.

Death by a Thousand Cuts: As mutual funds see more and more outflows — and as ETFs continue to experience massive inflows — DeMaso holds that their future remains to be seen: “Even if this is a step towards the grave for mutual funds, it’s going to be a very slow walk.”