Morgan Stanley Seeks to Replicate Vanguard’s ETF Share Class to Its Existing Mutual Funds

The approval of several spot Bitcoin exchange-traded funds (ETFs) in the United States last month has significantly shifted the dynamics in Wall Street’s fund managers. More cash inflows have been recorded in the past few weeks with a notable outflow from mutual funds. According to market data compiled by Bloomberg, mutual funds recorded an outflow of about $656 billion in 2023 compared to $578 billion in inflows registered by ETF fund managers.

However, more disruption could take place in the industry if the United States Securities and Exchange Commission (SEC) approves the recent application by Morgan Stanley (NYSE: MS) to add an ETF share class to its existing mutual funds in a similar fashion to the Pennsylvania-based The Vanguard Group Inc.

“An approval from the SEC here, one, or maybe multiple, would be the biggest news of 2024, and frankly, probably one of the most meaningful events in the asset-management industry in any number of years,” Ben Johnson, head of client solutions at Morningstar, noted.

Notably, more fund managers in the United States are seeking to minimize their tax obligation through the ETF share class. With Vanguard’s patent having expired earlier last year, six fund managers have so far applied with the US SEC to offer an ETF share class. From the two decades of Vanguard’s ETF Share Class, the company managed to minimize taxable capital in accordance with the law. However, according to Stacy Fuller, a partner at K&L Gates LLP, the US SEC will want to finalize the proposal on the swing pricing before approving the several applications on ETF share classes.

“The swing-pricing rule would, according to the SEC, impose the costs of mutual fund purchases and redemptions on the investors behind them. This would largely eliminate the possibility of cross-subsidization by one fund class or another, which is what the SEC has cited as holding back its approval for multi-class ETFs,” Fuller highlighted.

Why More Fund Managers Are Seeking ETF Conversion

In a recent interview, the current Federal Reserve Chairman Jerome Powell stated that the US high debt is unsustainable and drastic measures are needed to avoid overburdening future generations. The US national debt recently surpassed $34 trillion as the country focuses on the global geopolitical crisis in the Middle East and the conflict between Russia and Ukraine. Meanwhile, the ongoing border crisis on illegal immigrants has attracted notable attention from both sides of the political aisle with accusations of voter fraud.

Nevertheless, the underlying issue of the ongoing de-dollarization remains a threat to the US dominance in global politics amid the notable rise of the BRICS movement. Ultimately, more fund managers are looking at how to tap into digital assets as a hedge against inflation and poor monetary policies.