Vanguard Asks SEC to Allow Active ETF Share Classes
- The No. 2 ETF issuer seeks approval to carve ETFs using a tactic it patented decades ago.
- Vanguard joins BlackRock, Schwab and others attempting to create so-called ETF share classes.
- Issuers and investors increasingly prefer ETFs over mutual funds while active funds' share grows.
The Vanguard Group is stepping back into the future, aiming to use a tactic it had patented decades ago—for which its exclusivity expired in 2023—to create ETF shares from its mutual funds.
Vanguard joins dozens of other companies, including larger rival BlackRock Inc. (BLK), that have petitioned the Securities and Exchange Commission recently to create so-called ETF share classes from their mutual funds. More than 60 companies have sought exemptive relief from the rule that prevents them from doing so.
Vanguard’s application is its second attempt to create actively managed ETFs from its mutual funds. Its first attempt was rejected in 2015.
The move comes as exchange-traded funds seize market share from mutual funds, thanks to the former's ease of trading and less onerous tax implications. Mutual fund companies have converted dozens of funds holding nearly $200 billion into ETFs over the past few years; at the same time, ETF issuers are creating hundreds of new funds annually while few mutual funds come to market.
“ETFs are becoming the bigger choice for investors,” Morningstar Senior Manager Research Analyst Dan Sotiroff said.
ETF Share Class Approval Coming?
The company’s application may signal that the SEC is inclined to approve the share classes as soon as this year, he said: “Vanguard was probably holding off and decided to pull the trigger when approval was imminent.”
Vanguard, which manages $3.3 trillion in 91 funds, jumped into the exchange-traded fund business by getting permission to create ETFs from its mutual funds, patenting the tactic in 2003. It created dozens of ETFs from its mutual funds before the patent expired.
Vanguard's Top ETFs—Source: Factset
Active funds are the fastest-growing portion of the ETF industry. Issuers are branching into multiple directions requiring hands-on management—from leveraged to covered call to collateralized loans and more—as the market for traditional, low-cost, passive strategies, such as that employed by the Vanguard S&P 500 ETF (VOO), becomes saturated.
While active funds make up 10% of industry assets, they’ve pulled in 40% of net ETF flows so far this year, Bloomberg ETF Analyst Eric Balchunas wrote in an X post, which also noted that 90% of new launches were active.
