Exchange-traded funds have taken the investment world by storm over the last two decades, transforming how investors build portfolios, access markets, and manage taxes. What began as a niche product focused largely on passive index exposure has evolved into one of the most powerful forces in asset management, with ETFs now spanning everything from broad market exposure and active management to options strategies, private credit, and thematic investing.
The best part is that ETF innovation may be just getting started.
A growing number of asset managers are embracing a structure that allows the same investment strategy to be offered as both a mutual fund and an ETF share class, giving investors access to the same portfolio through whichever wrapper best fits their needs. This shift comes after years of structural limitations that prevented broader adoption, but with those barriers now removed and new products launching, the asset management industry may be entering its next major phase—one where the distinction between mutual funds and ETFs matters far less than the strategy itself.
Vanguard's Patent Pops
For years, one of the most valuable structural advantages in asset management was effectively controlled by a single firm. The concept was straightforward but powerful: a mutual fund and an ETF could operate as separate share classes of the same underlying portfolio, giving investors access to the same strategy through different wrappers while potentially benefiting from the ETF’s tax efficiency and flexibility. It was an elegant solution blending the familiarity of mutual funds with the innovation of ETFs, but for decades, it remained largely exclusive.
Vanguard investors enjoyed exclusive benefits versus other ETF investors thanks to its patent.
A major selling point of ETFs is their dual market structure. Most investors buy ETFs on the secondary market, but authorized participants—such as institutional investors, endowments, and investment banks—can buy ETFs on the primary market, exchanging cash or a basket of securities to create ETF shares that are then placed on the secondary market.
This process also works in reverse: when an AP sells, it can receive shares in-kind, which is why ETFs are more tax-efficient than mutual funds.
Vanguard’s patent allowed its mutual funds to use the in-kind creation/redemption mechanism to reduce taxes. For example, the Vanguard 500 Index Fund (VFIAX) has not paid a single capital gain since 2001, when the patent was created, because managers can use the ETF version—the Vanguard S&P 500 ETF (VOO) —for authorized participants to receive stock in-kind.
This gave Vanguard a significant edge in gathering assets, reducing investor costs, and dominating ETF league tables.
The Patent Wall Comes Down
That chapter has now closed. Vanguard’s patent protection expired, opening the door for competitors to pursue similar structures.
Asset managers moved quickly, with firms like Dimensional Fund Advisors and numerous others filing with the U.S. Securities and Exchange Commission for exemptive relief to offer dual-share-class funds of their own.
There have been some regulatory hurdles and pauses from the SEC. The agency voiced concerns that dual share class listings could create conflicts of interest between mutual fund and ETF share classes, and also raised questions about fee structures and differences in potential voting rights.
However, those concerns appear to have been resolved. Starting this year and accelerating in April, the SEC has been granting approvals to firms, including Goldman Sachs, DFA, Franklin Templeton, T. Rowe Price, and Columbia Funds.
The floodgates have now been opened for investors.
What the Dual Share Class Structure Actually Means
The approval and official launch of these dual-share-class vehicles is a major win for investors.
At its simplest, the dual-share-class structure allows one investment strategy to exist in a single pooled portfolio while being accessed through multiple wrappers. Rather than launching entirely separate funds, an asset manager can offer both a mutual fund share class and an ETF share class tied to the same underlying holdings. The investment strategy remains the same, but the delivery mechanism differs depending on investor preference.
This structure is powerful for investors on several fronts.
Mutual funds continue to offer conveniences that many investors and advisors value, including automatic investments, simplified retirement plan compatibility, and end-of-day pricing. ETFs, meanwhile, offer intraday tradability, generally better tax efficiency, and portability across brokerage platforms. Historically, investors had to choose between these benefits, but the dual-share-class model offers the possibility of having both.
Perhaps the most significant advantage comes down to taxes.
Traditional mutual funds often distribute taxable capital gains when managers sell appreciated securities to meet redemptions or rebalance portfolios. ETFs largely avoid this through the in-kind creation and redemption process, where securities can be exchanged without triggering taxable sales inside the fund.
When applied to a dual-share-class structure, that ETF mechanism could benefit the entire pooled portfolio, including mutual fund shareholders, which is exactly what Vanguard has done for its shareholders. There is also the potential for better returns and less cash drag. Because asset managers must maintain a cash buffer to support redemptions, mutual funds cannot be fully invested, but adding an ETF share class can reduce that burden and support returns.
Financial advisors may ultimately be among the biggest beneficiaries. A persistent challenge in portfolio management is implementation inconsistency: a strategy may exist as a mutual fund in one account, an ETF in another, and a slightly different separately managed account elsewhere. That fragmentation creates operational complexity, tax management challenges, and portfolio inconsistencies.
Overall, the expiration of Vanguard’s patent may not seem like headline-grabbing news, but it could represent one of the most meaningful structural shifts in asset management in years.
For investors, it promises greater flexibility, potentially better tax outcomes, and easier access to preferred strategies. For advisors, it offers a cleaner, more consistent way to build portfolios across different account types. For asset managers, it provides a path to modernize legacy product businesses while remaining competitive in an ETF-dominated world.
The Bottom Line
The ETF revolution fundamentally changed how investors access markets. The rise of dual-share-class funds may be the next phase of that transformation—not because it introduces something entirely new, but because it makes one of the industry’s most effective innovations available to everyone.
