Vanguard Pushes Ahead with Another Active ETF

Vanguard has been anything but passive while rolling out active ETFs.

The fund giant filed a prospectus with the Securities and Exchange Commission this week for the latest installment in its growing roster of active exchange-traded funds: The Vanguard Multi-Sector Income Bond ETF. The new product is notable as Vanguard is the only company with the SEC’s blessing to use dual share classes that allow mutual funds to operate like ETFs. Currently, that doesn’t extend to actively managed strategies, but active ETFs are kind of a thing right now.

No Exception to the Exemption

Although the SEC is primed to take action on ETF share classes industrywide (which may or may not include active management), Vanguard isn’t waiting around for that, said Jeff DeMaso, editor of The Independent Vanguard Adviser. One reason: Having an ETF share class can benefit the corresponding mutual fund by netting out capital gains through in-kind redemptions, he said. That mainly applies to equity funds, and it’s also an incentive for the numerous funds awaiting ETF share class approval.

Vanguard had a patent on the ETF share class that expired in 2023, and the SEC hasn’t granted approval of them to any other company, though there are dozens of applications. “They’re basically saying, ‘We don’t think there’s value in waiting, on the bond side,’” DeMaso said. 

With about 30% of assets managed by investment companies being in ETFs, it’s time to act on ETF share classes, SEC Acting Chairman Mark Uyeda said earlier this month at an industry conference. “More than two years have passed since the most recent set of exemptive applications for ETF share class relief was filed,” he said. “I have directed the commission staff to prioritize their careful review of the many applications filed for this relief, and I look forward to considering their recommendations.”

Active ETFs are big business:

• They are approaching $1 trillion in the US, hitting $956 billion at the end of February, according to Morningstar Direct.
• They raked in a monthly record of $43 billion in January.
• They now represent nearly 9% of all U.S. ETF assets, up from 2% at the beginning of 2019.

A Bonding Experience. Vanguard has brought 10 active ETFs to the US market, with half of those being equity-focused, and half in fixed income. The forthcoming Multi-Sector Income Bond ETF, along with a Short Duration Bond ETF in the works, will skew the firm’s active ETF lineup toward the fixed-income side. Vanguard could be waiting to add ETF shares of existing active equity mutual funds, DeMaso said.

“I still wonder if it’s going to solve the problem of outflows from active management,” DeMaso said. “I don’t know if just putting an active strategy into an ETF is going to be a cure-all for investor demand.”