'Thousands' of New Vanguard-Style ETFs Seen in $8.4T Market

What You Need to Know

Fidelity, Morgan Stanley and Dimensional Fund Advisors want to use the multi share-class structure due to its tax advantages.
Vanguard’s patent that prevented copycat funds expired in May. Now, the only barrier is SEC approval.

Outside the Fontainebleau Hotel in Miami, Florida last week, dozens of drones moved slowly through the night sky, projecting the Bitcoin symbol far and wide above one of the largest ETF gatherings of the year.

But inside the annual Exchange conference, industry insiders were obsessing over an event that could prove a far bigger deal for the $8.4 trillion business than the long-awaited launch of spot Bitcoin ETFs: Regulatory approval of new share-class structures.

It’s arcane stuff compared to the boom-crash-boom of crypto — no one ever launched drones to celebrate different investor classes, as Grayscale Investments did for its $23 billion Bitcoin fund.

But the question of whether the U.S. Securities and Exchange Commission would allow firms to replicate the fund model used exclusively by Vanguard Group for more than two decades was the hot topic among the industry professionals in attendance.

For good reason. That structure would permit an ETF to be listed as a share class of a broader mutual fund — effectively bringing the famous tax efficiency of the exchange-traded fund to the whole vehicle.

Vanguard’s patent that prevented copycat funds expired in May. Now, the only barrier is SEC approval.

Grayscale uses drones to create the Bitcoin symbol at the Exchange conference in Miami, Florida.

“While spot Bitcoin ETFs are currently dominating the headlines, those products are simply a sideshow compared to the potential impact of the multi-share class structure,” said Nate Geraci, president of The ETF Store, an advisory firm.

Heavyweights including Fidelity, Morgan Stanley and Dimensional Fund Advisors have all asked the regulator for permission to use the model, which could port the tax advantages of ETFs onto trillions of dollars of mutual fund assets.

It’s a tantalizing prospect for an industry looking for the next wave of growth after quadrupling in size over the past decade. There are already more than 3,300 U.S.-listed ETFs, and SEC approval could open the floodgates to thousands more.

“If the SEC allows for share classes, especially for active mutual funds, I think it’s huge for the ETF industry,” said Michael Venuto, chief investment officer at Tidal Financial Group. “There’s 10,000 mutual funds. The idea that 20% of them would add an ETF share class doesn’t seem insane to me.”

Mutual funds have largely bled assets in recent years as ETFs have grown in popularity. As a result, legacy asset managers have found themselves battling for a slice of the increasingly saturated ETF market.