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The SEC provided notice today that it intends to allow Dimensional's mutual funds to offer ETF share classes. Dimensional initially sought SEC approval two years ago. Vanguard's patent for mutual fund ETF share classes which applied only to index funds expired May 2023. It may take time before these new ETF share classes from Dimensional (and other firms that filed for exemptive relief) come to market.
Vanguard's patent for mutual fund ETF share classes — which applied only to index funds
It applied only to index funds when the patent was approved because there were only index ETFs in 2003. But the patent was generally applicable to all funds, index or not.
Not that any of this matters now that the patent is expired.
Claim 1 of the patent is a method to create a fund with both (a) share class(es) bought and sold at NAV and (b) share class(es) bought and sold on an exchange, i.e. ETFs. Claims 11 and 12 said that this invention (claim 1) could be applied to index funds (claim 11) and to actively managed funds (claim 12).
11. The method of claim 1 wherein the single investment company has an investment objective of tracking a specific benchmark index of securities. 12. The method of claim 1 wherein the single investment company is actively managed by an investment advisor.
The detailed description section of the patent talks about what types of investment companies (funds) an ETF share class could be added to:
The investment company could be an open-end fund (e.g., open-end mutual fund), a closed-end fund (e.g., closed-end mutual fund), or a UIT. The ETSs issued by the investment company are publicly listed and traded on a national stock exchange, such as the American Stock Exchange (AMEX). The investment company could have an investment objective of tracking a specific target index of securities (i.e., an index fund). Alternatively, the investment company could be actively managed by an investment advisor in a manner that does not attempt to track a target index.
I didn't realize Vanguard's patent also applied to actively managed funds. I recall previously reading that it only applied to index funds. Thanks for the correction!
Comments
It applied only to index funds when the patent was approved because there were only index ETFs in 2003. But the patent was generally applicable to all funds, index or not.
Not that any of this matters now that the patent is expired.
Claim 1 of the patent is a method to create a fund with both (a) share class(es) bought and sold at NAV and (b) share class(es) bought and sold on an exchange, i.e. ETFs. Claims 11 and 12 said that this invention (claim 1) could be applied to index funds (claim 11) and to actively managed funds (claim 12). The detailed description section of the patent talks about what types of investment companies (funds) an ETF share class could be added to: https://patents.google.com/patent/US6879964B2/en
I didn't realize Vanguard's patent also applied to actively managed funds.
I recall previously reading that it only applied to index funds.
Thanks for the correction!