Vanguard’s expired patent may emerge as game changer for fund industry

An Expired Patent Could Revolutionize the ETF Industry

An expired patent previously held by Vanguard has the potential to shake up the exchange-traded fund (ETF) industry. Wall Street viewed this patent as crucial to Vanguard’s success, as it allowed the firm to save a significant amount of money in taxes. Now, with the patent expiration, Vanguard’s ETF competitors may have the opportunity to utilize this innovative structure as well.

BNY Mellon’s global head of ETFs, Ben Slavin, described the patent expiration as a “game changer” in a recent interview on CNBC’s “ETF Edge.” The patent, which expired in 2023, allows investors to access the same portfolio of stocks through both a mutual fund and an ETF. This dual structure, with the same managers and holdings, is designed to reduce taxable events in the shared portfolio.

According to Ben Johnson of Morningstar, this unique structure has the potential to help millions of investors lower their tax burdens. His research firm sees this as a way for ETFs to function as a separate share class within a mutual fund, improving tax efficiency for all investors involved.

The ultimate decision on whether this structure will be widely adopted lies with the Securities and Exchange Commission (SEC). Johnson believes that approval from the SEC is a matter of “when, not if,” and anticipates that the industry could see developments as early as this summer.

This innovative approach to ETFs has the potential to revolutionize the industry, offering investors a more tax-efficient and cost-effective way to access diversified portfolios. As ETF providers explore new strategies to attract investors, the expiration of Vanguard’s patent could pave the way for a new era of innovation in the ETF landscape.