BlackRock Inc. is looking to gain ground over its top rival as it seeks to replicate a unique fund blueprint that helped Vanguard Group Inc. save its clients billions of dollars on taxes for two decades.
The Larry Fink-led firm filed on Wednesday for permission to create exchange-traded fund share classes of its mutual funds, a design that would port the tax advantages of the ETF wrapper onto billions of new assets.
Vanguard’s patent on the multi-share class fund expired in 2023, and since the start of last year the frenzy over the product has picked up: 33 asset managers have now asked the U.S. Securities and Exchange Commission for permission to recreate the model. While there’s no guarantee the regulator will sign off, BlackRock would bring new stakes to the horse race. It’s the largest ETF issuer, with around $3.1 trillion under management in the U.S. through those vehicles, and SEC approval could help widen the roughly $200 billion margin it holds over Vanguard in terms of ETF assets it oversees.
BlackRock’s share of the $10 trillion U.S. ETF marketplace has slipped from its peak of nearly two-thirds in 2006 to roughly 31% now, according to Bloomberg Intelligence data. Meanwhile, Vanguard has increased its stake to about 29% as fee-conscious financial advisers and retail investors flock to its low-cost, mostly passive funds. The $226 billion that has flowed into Vanguard ETFs in 2024 means it’s set to take in more money on a net basis than BlackRock in that market for a fifth consecutive year.
“The multi-class structure opens an important new avenue of choice for clients to invest in the manner that helps them achieve their distinct financial goals,” said Rachel Aguirre, head of U.S. iShares product at BlackRock.
Other asset managers including Fidelity, Morgan Stanley and Charles Schwab have also asked the U.S. regulator for permission to create ETF share classes of mutual funds.
But some roadblocks stand in the way: Chief among them, the U.S. presidential election next week could upend the makeup of the SEC administration in a few months, diminishing the chances of any movement on this before then.
“Initial comments on the exemptive applications from the SEC staff seek a tremendous amount of information,” said Joshua Weinberg, associate general counsel at the Investment Company Institute, an association representing the asset management industry. “They have evidently spent a lot of time thinking about the structure and are looking for applicants to produce significant data and analysis in support of their applications.”
Awaiting the OK
The SEC allowed Vanguard to use the tactic two decades ago, but has so far not given the green light to any other issuers to do the same.
The SEC declined to comment.
At stake is an enticing prospect for mutual-fund managers facing outflows as investors increasingly favor the generally cheaper, more tax-efficient ETFs. While there are already more than 3,300 U.S.-listed ETFs, SEC approval could pave the way for thousands more.
To be sure, there’s no deadline for the SEC to respond to the issuer filings, and approvals for other novel fund ideas have historically taken years.
“People radically overestimate how much the SEC pays attention to how many filings the industry hands over,” said Dave Nadig, an independent ETF analyst. “This is so far down the agenda at the SEC staff, and it’s so easy for them to kick the can down the road.”
There’s no certainty the watchdog will approve further use of the structure. Since giving Vanguard the go-ahead years ago, regulators have expressed concern about conflicts of interest between mutual fund and ETF investors, and cost differences between the pricing mechanisms of both funds.
And while ETFs have gained market share, mutual funds retain advantages, such as having a key role in the U.S. retirement system, with tax-advantaged mutual funds receiving steady inflows month after month.
“Given that we’re in the midst of an election year I don’t think we’re going to hear anything clear one way or another anytime soon,” said Ben Johnson, head of client solutions at Morningstar. “But longer-term, approval is more so a matter of when and not so much if.”
This article was provided by Bloomberg News.