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A New Era For ETF Taxation
These share-class changes could reshape portfolios. By Ron Delegge
AMERICAN HUMORIST WILL Rogers once captured the frustration of taxpayers with a comment that still rings true:“ The only difference between death and taxes is that death doesn’ t get worse every time Congress meets.”
But even if taxes are inevitable, sometimes relief comes in the strangest places. And one place investors will be able to find it is in the $ 37 trillion mutual fund industry, which last year saw tectonic changes in the way investors are going to build portfolios. These changes augur not only tax relief but a new approach to portfolio building.
An Expiring Patent Caused An Earthquake
The shake-up centered around the Vanguard Group’ s exchange-traded fund share-class patent, which expired in 2023. This patent had protected a dual-class product structure in which Vanguard could run mutual fund and ETF share classes alongside each other with the same underlying investment portfolio. The arrangement dramatically reduced the frictional cost of taxes to the fund company’ s shareholders by allowing the ETF share class to purge low-basis securities through in-kind redemptions.
The impact of that patent expiration is proving to be huge: It marks the end of Vanguard’ s exclusive ownership to the dual-class structure. And with that barrier gone, other fund companies can now append ETF share classes to their own existing mutual funds, improving the tax efficiency for their own share- holders. And those asset managers who had delayed their own entry into the ETF market will now have a relatively easy way to finally launch their own suites.
In other words, the landscape for active and passive investing has been transformed, to the benefit of both investors and their advisors.
What About The SEC?
ETF industry insiders long thought that Vanguard’ s exploding patent would be a game-changer and that every other firm would instantly latch on.
But there was one last hitch: Asset managers needed regulatory approval if they wanted to fast-track their entry into the ETF market( and if they had no ETF menu before). That’ s why they spent years lobbying and working behind the scenes to obtain such approval from the Securities and Exchange Commission— for what’ s known as its“ ETF share class exemption.”
The first significant milestone came in November 2025 when the agency let Dimensional Fund Advisors add an ETF share class
JANUARY / FEBRUARY 2026 | FINANCIAL ADVISOR MAGAZINE | 47