Perpetual Sees Investor Benefits in Copying Vanguard ETF Model

Perpetual Group sees investors enjoying a wider variety of options, including more exchange-traded funds in retirement plans, if U.S. regulators approve its effort to create ETF shares out of mutual funds—an exclusive privilege enjoyed by Vanguard Group. 

“Establishing ETFs as a share class carries a great deal of benefits,” Rob Kenyon, chief operating officer of the U.S. arm of Australia’s Perpetual told ETF.com. “It’s a great opportunity to offer choice and flexibility in the marketplace.” 

Perpetual first must get permission from the Securities and Exchange Commission. The U.S. arm of Perpetual, which, as of Dec. 31, had $134.9 billion ($A200 billion) in assets under management, filed its application this week with the SEC to add ETFs to its actively managed mutual funds. 

The company is seeking to take a page from Vanguard Group, the world’s biggest mutual fund issuer and second-biggest ETF company. Under a patent expiring in May, Vanguard is permitted to create shares of ETFs from its mutual funds. The patent covers only passive, index-style funds, while Perpetual hopes to get permission to create active, transparent (which provide daily disclosures of portfolio holdings) funds. 

Perpetual may have an uphill battle with the SEC, according to Jeremy Senderowicz, a lawyer at Vedder Price in Chicago who specializes in ETFs and mutual funds. Still, seeking approval to create transparent funds may help their case and persuade the regulator.

"It would be novel for the SEC to grant this relief for the Vanguard structure for active ETFs because they only approved it for index ETFs for Vanguard,” he told ETF.com. “Anytime something is novel, it's always more of a challenge to get the SEC to approve it." 

Because ETFs enjoy certain tax efficiencies, mutual fund companies are increasingly converting their products to ETFs. ETFs have unique selling and buying mechanisms, and they typically create fewer capital gain distributions, making them more tax efficient than mutual funds. 

Nearly 40 mutual funds having been reborn as ETFs since the first switch in March 2021, according to ETF.com data. About $40 billion in assets has switched so far, and another $60 billion to $80 billion may convert this year, CFRA Head of ETF Data & Analytics Aniket Ullal projects. And more than $1 trillion may convert over the next decade, Bloomberg Senior ETF Analyst Eric Balchunas says. 

Vanguard has been issuing ETFs as a share class under a patent since 2001, and now has 81 ETFs, with $2.01 trillion under management. It’s the No. 2 ETF issuer after BlackRock Inc.’s iShares. 

Contact Ron Day at  [email protected] or follow him on Twitter at @RonDayETF; contact Shubham Saharan at [email protected]