Finance
Vanguard’s expired patent may emerge as game changer for fund industry
An expired patent — previously held by Vanguard — may spark a shake-up in the exchange-traded fund industry.
Wall Street saw the patent as critical to Vanguard’s success because it saved an enormous amount of money in taxes. Now, the firm’s ETF competitors could get a chance to use it, too.
“It’s really a game changer,” BNY Mellon’s global head of ETFs’ Ben Slavin told CNBC’s “ETF Edge” this week.
Vanguard’s patent expired in 2023. How it works: Investors can access the same portfolio of stocks through two different formats: a mutual fund and an ETF. The portfolio has the same managers and the same holdings. “ETF Edge” host Bob Pisani notes the advantage is that it reduces taxable events in a (shared) portfolio.
Ben Johnson of Morningstar contends the structure could help millions of investors reduce tax burdens. His research firm describes it as a way for ETFs to exist as a separate share class within a mutual fund.
“ETF share classes appended to the mutual fund would help improve the tax efficiency of the fund to the benefit of everybody,” said Johnson, the firm’s head of client solutions.
It will ultimately come down to approval by the Securities and Exchange Commission.
“My thesis has been that it’s a matter of when, and not if,” said Johnson, who added the ETF industry thinks it could happen as soon as this summer.
Market uncertainty should “peak” around the Wednesday tariff deadline, according to Evercore ISI.
In a note this week, Julian Emanuel wrote investors should resist tariff angst and accumulate stocks.
“All you need is a little less uncertainty,” the firm’s senior managing director said Monday on CNBC’s “Fast Money.”
Emanuel compares the market pessimism to the March 2023 regional bank failures.
“The mood this morning and over the weekend talking with clients and talking with colleagues is as negative as I can remember going back to when Silicon Valley Bank blew up,” he said. “We didn’t know the Fed was going to ‘take care of business.'”
Emanuel’s bullish forecast comes as Wall Street wrapped up a negative quarter for the major indexes. The S&P 500 and tech-heavy Nasdaq just saw their worst quarterly performances since 2022.
The Nasdaq is now 14% below its record high hit in December. Yet, Emanuel is finding opportunity.
“We think you go back to the prior bull market winners in general: technology, communication services and [consumer] discretionary,” he said.
They were the S&P 500’s worst performing sectors of the month and quarter. But at these levels, according to Emanuel, companies will want to do stock buybacks which would help boost prices.
Meanwhile, he would avoid the recent leaders.
“What’s interesting about today is that everyone basically moved their sectors in the direction of how the entire quarter was going,” Emanuel said. “You saw consumer staples outperform. You saw health care very strong. In our view, those are probably the places where defense has been hiding.”
Health care gained 6% in the first quarter while consumer staples gained about 5%.
Emanuel thinks the market will regain its footing. His S&P 500 year-end price target is 6,800, which implies a 21% gain from Monday’s close.
“We don’t think you need a material clarity,” he said. “You need… the very, very extreme scenarios [tied to tariffs] becoming less possible.”
CNBC’s Christopher Hayes contributed to this report.
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