Vanguard Wannabe Faces SEC Battle to Mimic Tax-Slashing Funds

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Advisor Perspectives
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Vanguard Group’s best-of-both-worlds stranglehold over the money-management industry is facing a new kind of challenger.

This week Washington, DC-based F/m Investments filed to create mutual funds as a share class of its ETFs, in a bold bid to mirror the tax-saving hybrid investing vehicles pioneered by Jack Bogle’s firm more than two decades ago.

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In the process, the investment boutique has opened up a new front in the quest among issuers to secure Securities and Exchange Commission approval to replicate a unique fund structure that helped Vanguard become the industry’s second-biggest manager after BlackRock Inc.

At stake: the ability to tap into the multitrillion-dollar industry of mutual funds, all while retaining the tax efficiency of ETFs.

While Vanguard uses ETFs as a share class for many of its mutual funds, F/m Investments is essentially seeking to do the reverse with a first-of-its-kind structure that would establish mutual funds under the ETF banner.

The bid, laid out in a Tuesday filing, comes after at least two issuers also applied this year to recreate Vanguard’s model — the patent for which expired in May.

And F/m has bold ambitions: Just like Vanguard, the firm has also applied for a patent that would help it control who could use its fund design.

“Vanguard had this advantage for the last 20 years — it literally shifted where investment dollars went and the benefits of washing out capital gains, and no one could really use it without paying a licensing fee,” said Todd Sohn, ETF Strategist at Strategas. “Now we have a reverse effect in play where another firm is trying to do the same thing.”

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