In a strategic move to expand its product offerings, Fidelity Investments has submitted two filings with the Securities and Exchange Commission (SEC) aiming to adopt a multi-share class structure similar to that of Vanguard's exchange-traded funds (ETFs). The proposed structure would allow an unspecified number of Fidelity's actively managed open-end mutual funds, which focus on total return investment strategies, to list ETF shares.
The initiative, revealed today, is designed to benefit both ETF and mutual fund shareholders by reducing fees and improving tax efficiency. This is achieved through the in-kind creation process of the ETF share class, which has been a hallmark of Vanguard's patented approach. Vanguard's patent, which allowed for these efficiencies, expired in May, paving the way for other firms to implement similar structures.
Fidelity's move comes after earlier efforts by PGIA and Dimensional Fund Advisors, who filed for similar permissions earlier this year. Their applications are still under review by the SEC. These filings collectively signal a growing interest in the multi-share class approach as asset managers seek to provide investors with more versatile and cost-effective investment options.
In its filings, Fidelity has addressed potential regulatory concerns highlighted by the SEC, such as the risk of cross-subsidization within the multi-class structure. To mitigate these risks, Fidelity proposes limiting its multi-class funds to those capable of managing cash flows effectively and preventing cash imbalances. The firm's proactive measures aim to ensure that the interests of all shareholders are safeguarded while capitalizing on the operational and tax advantages that the multi-class ETF structure offers.
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