The Patent That Helped Vanguard Clients Pocket Big Gains Expires

The patent that’s given Vanguard Group an edge over competitors for the past 20 years — and helped its clients pull in more than $100 billion worth of additional investment gains — expired today.

Rival fund managers are now free to replicate a unique but controversial fund structure created by the Jack Bogle-founded firm in 2001 that allows mutual funds to act like exchange-traded funds by generating returns for investors while minimizing taxes.

It’s unclear if the expiration marks a minor footnote in history or a pivotal moment for fund managers looking for a fresh edge in an increasingly cutthroat market. The answer in large part is riding on the US Securities and Exchange Commission and the stance it takes. Just because it allowed Vanguard to start using the tactic two decades ago doesn’t mean it will allow others to do the same now.

“The SEC is the clear lynchpin here,” said Nate Geraci, president of The ETF Store, an advisory firm. “If they green-light this structure, I expect a number of traditional mutual fund companies to seriously explore using it.”

The regulator needs to grant companies exemptive relief from current rules that would let them use the fund structure that effectively gives a mutual fund access to the famous tax efficiency of ETFs.