Vanguard’s Multi-Class ETF Filing Signals Increased Competition in Active Fixed Income

On June 11, 2025, Vanguard filed an application with the U.S. Securities and Exchange Commission for a multi-class active ETF structure. The filing requests approval of a structure where Vanguard can operate one class of shares as an ETF, while having one or more classes that are not exchange-traded. Vanguard already has approval to launch ETFs as a share class of indexed mutual funds, a structure for which it had a patent that expired in 2023. Since the patent’s expiration, over 60 asset managers have filed with the SEC for this dual ETF-mutual fund share class structure for both indexed and active strategies. It appears likely that the SEC will approve these applications sometime this year.

Vanguard’s active share class filing is significant because it signals an intent to grow in the active ETF category, which has very different competitive dynamics from the indexed ETF category. Figure 1 shows the market share (as measured by net assets) of the largest ETF issuers in both categories.

The market share leaderboards for active and indexed ETFs look very different. Only three firms—BlackRock, First Trust and Fidelity Investments—are in the top 10 largest managers of both indexed and active ETFs. As of June 11, 2025, the indexed ETF category was over 10 times larger than the active ETF category, but it is a mature space dominated by three large players: BLK, Vanguard, and State Street.

Related:Vanguard’s SEC Application Ramps Up Competition in Dual-Share ETF Race

In contrast, the active ETF category is a smaller but growing space that is less top-heavy and entrenched, with a long tail of smaller providers. The top two active ETF providers (Dimensional and JPMorgan) leapfrogged into those positions by converting existing mutual funds. Most of the largest active equity ETF managers are not active in the tradition of stock pickers that are trying to beat the market. For example, Dimensional uses a systematic factor-based approach akin to smart beta indexing, while JPMorgan’s largest active ETFs are focused on income generation through covered call writing. Overall, the active ETF category offers opportunities for a firm like Vanguard to try and capture market share.

Can the “Vanguard Effect” Be Brought to Active Fixed Income ETFs?

Vanguard does not appear to view itself as just an index fund manager but rather as a firm that can dramatically lower costs for investors in both indexed and active strategies. In his May 1, 2025, letter to investors, Vanguard CEO Salim Ramji said, “Bogle’s insight was contrarian because lower cost portfolios tend to outperform higher cost ones—in index and active. … The Vanguard Effect has also spurred price competition across the industry, as our low-cost offerings draw attention to the importance of fees to long-term results.”

Related:What Are the Best Asset Classes for Active Management?

In the letter, Ramji explicitly identified active fixed income as a potential area for growth. He stated, “The bond market is significantly larger than the stock market and much more complex and inefficient, providing greater opportunities for active management to outperform. But competitors’ fees for active fixed income have remained persistently high. You deserve a better deal.”

Figure 2 summarizes the asset-weighted net expense ratio for U.S.-listed ETFs by asset class and whether they are indexed or active. Leveraged and inverse ETFs are classified as a separate category. The chart highlights the active-indexed fee discrepancy, which creates an opportunity for low-cost managers like Vanguard in the active fixed income category.

While the opportunity for growth is clear, Vanguard has yet to prove that it can succeed in the active ETF income category. While active ETFs account for 13% of Vanguard’s U.S. ETF lineup by count, they only account for a minuscule 0.4% of its ETF assets. As shown in Table 1, Vanguard accounts for four of the top 10 indexed bond ETFs in the U.S. but none of the top 10 active bond ETFs.

In the fixed income asset class, the asset-weighted expense ratio for active ETFs was more than 3.5x that of indexed ETFs. Similarly, for equities, active ETFs had 2.8x the asset-weighted fees of indexed equities. That pricing differential represents a potential opening for a low-cost provider that already has significant scale in its business to undercut its competitors on price.

Launching ETFs as a share class of its mutual funds may offer an opportunity to change this dynamic. Vanguard currently has over 140 active mutual funds, many of which are fixed-income focused. Adding an ETF share class will allow it to quickly scale in the active ETF space while also porting over its track record. However, it will need to contend with formidable competitors like PIMCO, JPMorgan Chase, Janus Henderson, and Fidelity, all of which have an established presence in active fixed-income ETFs.

The SEC is currently communicating with all the ETF issuers that applied for the multi-share class structure and have indicated that the filings will be approved sometime this year. In addition to receiving approval, issuers will need to work through operational details such as getting approval from their boards. They will also need to work on distribution strategies since many mutual fund share classes have distribution fees, while ETF share classes do not. This could create issues with distributors such as broker/dealer firms. Once ETFs as a share class go live, it will be important to watch the cost and investor adoption dynamics, particularly as large players like Vanguard attempt to grow in the active fixed income category.