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An expired patent — previously held by Vanguard — may spark a shake-up in the exchange-traded fund industry.
Wall Street saw the patent as critical to Vanguard’s success because it saved an enormous amount of money in taxes. Now, the firm’s ETF competitors could get a chance to use it, too.
“It’s really a game changer,” BNY Mellon’s global head of ETFs’ Ben Slavin told CNBC’s “ETF Edge” this week.
Vanguard’s patent expired in 2023. How it works: Investors can access the same portfolio of stocks through two different formats: a mutual fund and an ETF. The portfolio has the same managers and the same holdings. “ETF Edge” host Bob Pisani notes the advantage is that it reduces taxable events in a (shared) portfolio.
Ben Johnson of Morningstar contends the structure could help millions of investors reduce tax burdens. His research firm describes it as a way for ETFs to exist as a separate share class within a mutual fund.
“ETF share classes appended to the mutual fund would help improve the tax efficiency of the fund to the benefit of everybody,” said Johnson, the firm’s head of client solutions.
It will ultimately come down to approval by the Securities and Exchange Commission.
“My thesis has been that it’s a matter of when, and not if,” said Johnson, who added the ETF industry thinks it could happen as soon as this summer.
