Boston-based financial giant, Fidelity Investments, has initiated efforts to secure clearance to offer some of its premier mutual funds in the form of exchange-traded funds (ETFs). The move comes as a direct challenge to Vanguard Group's longstanding dominance in this specific ETF mechanism. According to a regulatory submission made on Tuesday, Fidelity is pursuing a government waiver that would enable its actively managed mutual funds to introduce a distinct ETF share class. This endeavor to venture into the dual-share structure comes in the wake of Vanguard's patents on this model expiring this past May, a structure they pioneered over two decades ago, attributing to their formidable position in the ETF market.
The dual-share format historically offered by Vanguard has provided mutual funds with an edge by granting them the tax benefits traditionally associated with ETFs, leading to enhanced after-tax returns. This ETF structure uniquely dodges capital gains taxes due to its specific in-kind redemption process. Vanguard, utilizing this model legally, has effectively lowered the tax burdens on its funds for over twenty years. In Fidelity's application, there is an indication that managers supervising these dual-class funds could adopt “careful tax management” tactics, emphasizing the potential tax benefits.
However, while Vanguard's patent expiry eliminated a significant hurdle, obtaining the necessary clearance from the US Securities and Exchange Commission (SEC) remains uncertain. The SEC has previously exhibited reservations regarding potential conflicts of interest arising between mutual fund and ETF investors. Worth noting is Vanguard's own experience: while they secured clearance for this structure pertaining to index funds, their attempt to introduce ETF share classes for active strategies didn't gain SEC's approval.
Comparatively, Fidelity currently oversees approximately $36 billion in ETF assets, translating to a mere 0.5% of the market share, a stark contrast to Vanguard’s dominant presence with nearly 30% of all ETF assets in the US. Eric Balchunas, a senior analyst at Bloomberg Intelligence, predicts a bullish future for Fidelity in the ETF domain, anticipating significant strategic moves by the firm in the upcoming decade.
