Fidelity files for Vanguard-style ETF share class

Fidelity has filed to adopt Vanguard’s ETF multi-share class structure, becoming the third manager to do so.

In two filings with the Securities and Exchange Commission, the manager proposed allowing an unspecified number of open-end mutual funds to list ETF shares. Fidelity described the applicable funds as being “in general” actively managed and pursuing a total return investment mandate.

“Funds will be chosen where the adviser believes the multi-class structure is in the best interest of the ETF class and mutual fund class individually, and the fund as a whole,” the filings state.

PGIA, the US division of Australia’s Perpetual, filed for similar relief in February, even before the May sunset of Vanguard’s 22-year patent on the structure. Dimensional Fund Advisors followed suit this summer.

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Both filings remain pending.

Vanguard’s patent has been instrumental in helping hold down fees by spreading operational costs across a broader base of assets while also reaping tax efficiencies by executing portfolio changes through the ETF share class’s in-kind creation and redemption process.

The SEC has flagged potential conflicts with the multi-class structure, including possible “cross-subsidisation”, sowing doubts about its willingness to allow other companies to share the relief.

Fidelity’s filings claim to address those concerns, in large part by limiting its multi-class funds to those that would avoid cash imbalances.

“Funds will be chosen where the adviser believes cash balances (if needed) can be efficiently raised and equitised and/or are often part of the portfolio management strategy, and mutual fund class cash flows can be efficiently used to effect rebalances,” the manager said.

“In addition, most investors in existing funds are long-term investors. As a result, applicants do not expect the funds that would offer ETF classes to maintain cash balances at a level that would cause any significant cash drag on fund performance.”

Representatives from Fidelity declined to comment on the filings.

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