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Vanguard Files for ETF Classes of Active Mutual Funds
Shareholders who have been enduring large taxable capital gain distributions brought on by actively managed fund redemptions stand to get some relief if this application is approved.
although 50% of my vanguard posts are not flattering, so far they have run an 'admirable' process in making sure mf holders share the etf class benefits, and not pricing etf share fees less than admiral shares. see a fiduciary@work!
If I were a shareholder of an actively managed fund and Vanguard opened a new, cheaper share class that I qualified for, I would be elated. Before you could say Jack Robinson I'd have made a tax-free exchange to that cheaper share class.
I did this when Vanguard opened Admiral shares that cost less than my existing Investor class shares. Such conversions are largely paper events with no impact on the underlying fund portfolio. And I owned the same percentage of that portfolio before and after my conversion.
When Vanguard offers a new share class with lower expenses than existing share classes, investors win. They have the option of staying with their existing share class and paying the same amount as before, or converting and paying a lower ER. (Though there are the added costs with ETF shares of bid/ask spreads, NAV tracking error, and SEC fees.)
For example, shareholders who own VTIAX have the option of staying with those shares and paying 9 basis points/year or converting to VXUS and paying half as much, just 5 basis points. Vanguard can do this because it costs them less to run VXUS than to run VTIAX with its additional shareholder services.
Vanguard eventually converts Investor shares into Admiral shares, if eligible. But I do it the next day & not wait for Vanguard to get to it.
I assume that with the new ETFs classes of active mutual funds, it would be one-way street, mutual fund to ETF conversion only (as is for its passive funds). The ETF classes may have the same/comparable ERs to Admiral classes (also as is for many of its passive funds). Most of my VG funds are in IRAs, so, distributions and taxes don't matter now. I may just hang on to Admiral OEFs; there is the convenience of reinvestments on ex-div dates.
But I agree, if the ETF classes will have lower ERs than Admiral, no need to stick around.
A phrase one commonly sees in PR announcements of ETF shares is: "has filed for exemptive relief". We rarely give that a moment's thought; at least I don't. Still, what's included in those filings bears directly on this thread.
The SEC is concerned about one share class subsidizing another. Typically, fund sponsors describe how they will oversee the funds so that this issue is minimized. Charging a different ER for the ETF share class seems to be part of that solution.
I assume that with the new ETFs classes of active mutual funds, it would be one-way street, mutual fund to ETF conversion only (as is for its passive funds
Share class conversions usually go only one way (OEF to ETF). F/M's application is an exception so requires additional exemptive relief.
One significant difference between F/m’s request and the earlier requests by Dimensional and Perpetual, as well as the long-standing Vanguard relief, is that F/m would offer a bilateral exchange privilege, meaning mutual fund class shareholders could exchange their shares for ETF class shares, and ETF class shareholders could exchange their shares for mutual fund class shares. Vanguard’s relief only permits mutual fund shareholders to exchange their shares for ETF shares, and not the reverse. The Dimensional and Perpetual applications also contemplate only mutual fund for ETF share class exchanges. This bilateral feature requires exemptive relief under for two reasons. First, Rule 6c-11 requires ETF shares to be listed on a national securities exchange, and mutual fund class shares of an ETF would not be listed on an exchange. Second, mutual fund class shares would be exchangeable directly for newly issued ETF class shares, and vice versa, while Rule 6c-11 requires that ETFs issue and redeem shares at their net asset value per share (“NAV”) only to authorized participants in creation unit aggregations.[footnote omitted]
I thought that exemptive-reliefs were almost gone in 2019 SEC ETF Reforms. The SEC grandfathered some exemptive-reliefs due to fund industry lobbying. But why is SEC considering exemptive-reliefs for new applications?
One problem with exemptive-reliefs was that they became progressively tougher, so those such as Vanguard got very favorable exemptive-reliefs opposed the new ETF Reforms. A compromise was to grandfather some exemptive-reliefs but rescind many others.
For those unfamiliar, since 1990s, the ETFs were approved with exemptive-reliefs to mutual fund regulations. This was supposed to change in 2019.
summary, please correct : - no such thing as etf<->mf round tripping without tax consequences - no such thing as etf<-> round tripping without some type of net value loss - there may be a 1-time mf->etf without above? (this is surprising, as i generally see this as a trade for something that now mostly has stock equity rules and consequnces)
The 2019 SEC reform is Rule 6c-11. That lessened but did not eliminate the need for exemptive relief. From the cited page:
Mutual funds wishing to offer an ETF share class, or, in F/m’s case, ETFs wishing to offer a mutual fund share class, require exemptive relief because Rule 6c-11 under the 1940 Act does not provide relief from Sections 18(f)(1) or 18(i) of the 1940 Act, nor does Rule 6c-11 expand the scope of Rule 18f-3’s multi-class relief to permit a single fund to offer both an ETF class and a mutual fund class.
CNBC, May 20, 2025 (this may have been cited in another thread):
More than 50 asset managers have petitioned the SEC for exemptive relief in order to offer an ETF share class of an existing mutual fund.
The Vanguard application is for an exemption from various SEC rules for each of the named Vanguard trusts. These days, most funds are "series" in a trust holding multiple funds. The Wellesley Income Fund just happens to be a series (fund) in a trust called The Wellesley Income Fund.
The Vanguard application only asks for permission to offer ETF class shares for "any existing and future series" of actively managed funds. It doesn't commit Vanguard to actually offering any new ETF class shares.
Comments
although 50% of my vanguard posts are not flattering, so far they have run an 'admirable' process in making sure mf holders share the etf class benefits, and not pricing etf share fees less than admiral shares.
see a fiduciary@work!
I did this when Vanguard opened Admiral shares that cost less than my existing Investor class shares. Such conversions are largely paper events with no impact on the underlying fund portfolio. And I owned the same percentage of that portfolio before and after my conversion.
When Vanguard offers a new share class with lower expenses than existing share classes, investors win. They have the option of staying with their existing share class and paying the same amount as before, or converting and paying a lower ER. (Though there are the added costs with ETF shares of bid/ask spreads, NAV tracking error, and SEC fees.)
For example, shareholders who own VTIAX have the option of staying with those shares and paying 9 basis points/year or converting to VXUS and paying half as much, just 5 basis points. Vanguard can do this because it costs them less to run VXUS than to run VTIAX with its additional shareholder services.
I assume that with the new ETFs classes of active mutual funds, it would be one-way street, mutual fund to ETF conversion only (as is for its passive funds). The ETF classes may have the same/comparable ERs to Admiral classes (also as is for many of its passive funds). Most of my VG funds are in IRAs, so, distributions and taxes don't matter now. I may just hang on to Admiral OEFs; there is the convenience of reinvestments on ex-div dates.
But I agree, if the ETF classes will have lower ERs than Admiral, no need to stick around.
The SEC is concerned about one share class subsidizing another. Typically, fund sponsors describe how they will oversee the funds so that this issue is minimized. Charging a different ER for the ETF share class seems to be part of that solution.
I assume that with the new ETFs classes of active mutual funds, it would be one-way street, mutual fund to ETF conversion only (as is for its passive funds
Share class conversions usually go only one way (OEF to ETF). F/M's application is an exception so requires additional exemptive relief. https://www.ropesgray.com/en/insights/alerts/2023/08/f-m-investments-files-for-exemptive-relief-for-a-mutual-fund-share-class-of-an-etf
One problem with exemptive-reliefs was that they became progressively tougher, so those such as Vanguard got very favorable exemptive-reliefs opposed the new ETF Reforms. A compromise was to grandfather some exemptive-reliefs but rescind many others.
For those unfamiliar, since 1990s, the ETFs were approved with exemptive-reliefs to mutual fund regulations. This was supposed to change in 2019.
https://www.sec.gov/newsroom/press-releases/2019-190
summary, please correct :
- no such thing as etf<->mf round tripping without tax consequences
- no such thing as etf<-> round tripping without some type of net value loss
- there may be a 1-time mf->etf without above? (this is surprising, as i generally see this as a trade for something that now mostly has stock equity rules and consequnces)
https://personal1.vanguard.com/pdf/etfpdf.pdf
vanguard mf->etf list only has mf with 'index' in name. probably will be same at others (fidelity 0 fee,...).
what will happen with active mf spawning an etf?
The Vanguard application only asks for permission to offer ETF class shares for "any existing and future series" of actively managed funds. It doesn't commit Vanguard to actually offering any new ETF class shares.