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The Expiration of Vanguard's Patent May Be a Game Changer for the Fund Industry

March 29, 2025
minute read

A recently expired patent—once held by Vanguard—could bring a significant transformation to the exchange-traded fund (ETF) industry.

For years, Wall Street has viewed this patent as a key factor behind Vanguard’s success, primarily because it allowed the firm to minimize tax costs in a way that its competitors could not. Now that the patent is no longer in effect, other asset managers may soon have the opportunity to implement the same strategy, potentially leveling the playing field in the ETF market.

“This is a major shift,” said Ben Slavin, global head of ETFs at BNY Mellon, during an interview on CNBC’s ETF Edge this week.

Vanguard’s patent, which expired in 2023, allowed investors to gain exposure to the same portfolio of stocks through two different investment vehicles: mutual funds and ETFs. These two formats shared the same underlying portfolio, were managed by the same team, and held identical securities. The advantage of this structure, as ETF Edge host Bob Pisani explained, is that it helps reduce taxable events within the shared portfolio.

Ben Johnson, head of client solutions at Morningstar, believes this framework has the potential to help millions of investors lower their tax liabilities. According to his research firm, the structure enables ETFs to function as an additional share class within an existing mutual fund, making tax efficiency a major benefit.

“By adding ETF share classes to mutual funds, the overall tax efficiency of the fund improves, benefiting all investors involved,” Johnson said.

The future of this structure, however, depends on approval from the Securities and Exchange Commission (SEC). Johnson remains optimistic, suggesting that it’s not a question of if the SEC will greenlight the strategy for other firms, but when.

“My view has always been that it’s just a matter of time,” he said, adding that many within the ETF industry believe approval could come as early as this summer.

If regulators allow more asset managers to adopt this approach, it could reshape the ETF landscape by making tax-efficient strategies more widely available. This could be especially beneficial for firms that offer both mutual funds and ETFs, as it would enable them to enhance their offerings while reducing tax burdens for investors.

Vanguard’s success with this structure has been well-documented. By allowing its mutual funds and ETFs to coexist within the same portfolio, the company has been able to provide investors with a more tax-efficient way to manage their investments. This advantage has contributed to Vanguard’s dominance in the ETF space, as investors have sought to maximize after-tax returns.

With the expiration of the patent, rival firms now have the opportunity to integrate this structure into their own products—provided they receive regulatory approval. If they do, it could lead to a wave of innovation in the industry, as firms look to attract investors with more tax-efficient investment options.

In addition to benefiting individual investors, this development could also reshape competition among asset managers. Firms that have traditionally specialized in mutual funds may find themselves in a stronger position to compete with ETF-focused companies. By offering ETF share classes within their existing mutual funds, they can provide investors with greater flexibility while improving tax efficiency.

The SEC’s decision on this matter will be closely watched. If the regulator grants approval, it could open the door for widespread adoption of the mutual fund-ETF structure. This would mark a major shift in how ETFs are structured and could lead to increased adoption of ETFs by investors who previously favored mutual funds for long-term investments.

Despite the potential benefits, some industry experts caution that implementing this structure is not without challenges. Asset managers looking to adopt the approach would need to ensure that their operational and compliance frameworks are capable of handling the complexities of a shared portfolio structure. Additionally, the SEC may impose certain restrictions or conditions to prevent potential risks associated with the model.

Nonetheless, anticipation is growing within the ETF industry. Many firms are eager to take advantage of the expired patent and are closely monitoring regulatory developments. If approved, this structure could become a standard feature of many investment firms’ offerings in the years ahead.

In the meantime, investors and industry professionals alike will be waiting for the SEC’s decision, which could mark the beginning of a new era in ETF innovation.

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Adan Harris
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Eric Ng
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John Liu
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Bryan Curtis
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Adan Harris
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Cathy Hills
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