Morgan Stanley Seeks SEC Approval for Dual Mutual Fund-ETF Share Class

Vanguard’s expired patent on the structure has cleared the way for competitors to follow suit.

Morgan Stanley Investment Management has asked the U.S. Securities and Exchange Commission for permission to seek a multi-share class structure for its exchange traded funds, based on a model first offered by the Vanguard Group in 2000.

In the SEC filing dated Jan. 29, Morgan Stanley IM contended that such an arrangement "would permit investors who prefer an ETF structure to gain access to established funds’ investment strategies" and thus represents "an attractive investment opportunity."

The move comes just weeks after Morgan Stanley introduced its 12th ETF since joining the exchange-traded space in less than a year ago.

Yet how the SEC proceeds with the applications from MSIM and three other applicants seeking the same relief remains unclear. Though Vanguard’s patent on issuing ETF shares as a class for its existing mutual funds expired in May 2023, the SEC has expressed concerns about whether the company’s structure unfairly made its ETF shareholders subsidize mutual fund shareholders. 

This much is certain: Morgan Stanley’s application signals its effort to expand its share of the ETF market. Bloomberg reported in May that $100 billion in added gains went to clients as a result of Vanguard’ class structure. 

But with Vanguard no longer in the driver’s seat, the door opened in the second half of 2023 for three firms to apply for similar relief. Dimensional Fund Advisors and F/m Investments did so in August, followed by Fidelity in October. A fourth, the U.S. arm of Australia’s Perpetual Group, sought relief in February 2023, just prior to the expiration date.

Vanguard Orders

The filing references to "the Vanguard Orders," granted by the SEC between 2000 and 2007, which allowed Vanguard to dominate market share in the ETF space. As one of the major sponsors of index-based ETFs, Vanguard has "more than $2 trillion in assets invested through exchange-traded classes, representing almost 30% of all ETF assets in the United States," according to the Morgan Stanley IM application.

Morgan Stanley stated that the funds “will be chosen where the Adviser believes the multi-class structure is in the best interest of the ETF Class and Mutual Fund Class individually, and the Fund as a whole.” The company also noted that it continues “to see demand for ETFs to help investors meet their distinct financial goals and look for opportunities to grow their lineup with innovative strategies that offer choice, value, and new opportunities to help meet their evolving needs.”

Morgan Stanley launched its ETF platform in February 2023 with six Calvert-branded ETFs. Morgan Stanley presently has 12 ETFs totalling more than $600 million in total assets. The largest of these, the Calvert US Large-Cap Core Responsible Index ETF (CVLC), has assets of $260 million and seeks positive global change through an index composed of common stocks of the 1000 largest U.S. companies. Its expense ratio is 0.15%. 

Earlier this month, MSIM introduced its Eaton Vance Floating-Rate ETF (EVLN), comprised of no less than 80% in floating-rate credit investments; to date, the fund has assets totalling $21 million and an expense ratio of 0.60%.