BlackRock wants to replicate Vanguard tax saving strategy

BlackRock Inc. is after a proven strategy to keep its clients’ tax bills down, eyeing a blueprint that allowed Vanguard Group Inc. to save billions over two decades. On Wednesday, BlackRock filed for the SEC’s green light to create exchange-traded fund (ETF) share classes of its mutual funds, a model with serious tax perks that could reshape billions in new assets if it’s approved.

Vanguard’s patent on this multi-share class model expired last year, and now 33 asset managers, including BlackRock, have jumped at the chance, hoping to get SEC approval for their own versions. No one’s guaranteed the SEC will go for it, but BlackRock’s already the biggest ETF player in the U.S. with $3.1 trillion in assets. Approval would help BlackRock expand the $200 billion edge it holds over Vanguard in ETF assets under management, widening its lead in a market where competition is as aggressive as it gets.

BlackRock’s position and growing Vanguard competition

Once commanding nearly two-thirds of the $10 trillion U.S. ETF market in 2006, BlackRock’s share has shrunk to 31% today, according to Bloomberg Intelligence. Meanwhile, Vanguard has surged, holding about 29% of the market, as advisors and retail investors flock to low-cost, mostly passive options. By 2024, Vanguard ETFs have attracted a net $226 billion, positioning Vanguard to beat BlackRock in net inflows for the fifth consecutive year.

With this new structure, BlackRock aims to offer clients more choice in how they reach their financial goals. Rachel Aguirre, head of U.S. iShares products at BlackRock, emphasized that a multi-class structure opens up distinct investing paths for diverse client needs. BlackRock’s plan isn’t unique—Fidelity, Morgan Stanley, and Charles Schwab have all applied for similar permissions, banking on the same tax efficiencies for mutual funds structured with ETF share classes.

But the timing isn’t entirely in their control. SEC approval could be delayed if the upcoming U.S. presidential election reshuffles the agency’s administration. It’s anyone’s guess if movement on the applications will happen soon, or if a delay could stall things for months. As Joshua Weinberg, associate general counsel at the Investment Company Institute, puts it, the SEC’s feedback has demanded “a tremendous amount of information.” The agency is analyzing applications from all angles, and it’s taking time.

A crucial SEC decision looms

The SEC let Vanguard use this strategy two decades ago, but hasn’t yet approved it for other issuers. If the SEC greenlights BlackRock’s plan, the broader mutual fund market could transform, benefiting managers facing outflows as investors switch to cheaper, more tax-efficient ETFs. There are already over 3,300 ETFs listed in the U.S., and SEC approval could pave the way for many more.

But there’s no clear timeline here. Past approvals for similar novel ideas have taken years, and the SEC’s willingness to add more ETFs is uncertain. Dave Nadig, an independent ETF analyst, noted the agency isn’t rushing, saying, “People radically overestimate how much the SEC pays attention to how many filings the industry hands over.” The approval’s future is murky, and so is the agency’s stance on ETFs potentially clashing with mutual funds in cost structures and tax treatment.

Meanwhile, mutual funds still hold certain advantages. They play a central role in the U.S. retirement system, where tax-advantaged inflows happen month after month. This stability means mutual funds aren’t fading away entirely, even as ETFs gain popularity.

BlackRock’s crypto integration and election implications

As BlackRock races to expand its tax-efficient ETFs, it’s also flexing its influence in crypto markets. Its Bitcoin fund is booming, especially as speculation builds over the U.S. presidential election outcome. On Wednesday alone, $872 million poured into BlackRock’s iShares Bitcoin Trust ETF—a daily record. This year, its subscriptions have topped global ETF rankings.

The massive inflows have fueled the so-called “Trump trade,” as pro-crypto Republican candidate Donald Trump leads in betting odds heading into Election Day on November 5. Trump has pitched the U.S. as a future crypto hub, with favorable regulations aimed at keeping projects onshore. Even CoinDesk, not typically a fan, has endorsed his crypto policy. Darius Sit, CIO at Singapore’s QCP Capital, says BlackRock’s influence on crypto has been massive, explaining, “When you have BlackRock CEO Larry Fink on CNBC talking about how bitcoin is a store of value, that’s when you know crypto has become part of the American investing narrative.”

There’s also chatter about how a Trump administration might reshape the SEC. If Trump wins, his administration could replace SEC chair Gary Gensler, who’s been seen as tough on crypto. This regulatory shift could make the U.S. a friendlier place for crypto firms, while raising questions for Hong Kong, which has been courting U.S. crypto firms with its own clear-cut rules.

For BlackRock’s Bitcoin fund, the timing couldn’t be better. The fund is now valued at $31 billion, and it’s nearing an all-time high, with a 13% rally this month. Investors are watching closely, as many other digital assets experience similar growth trends. “There’s a lot of demand coming into these ETFs,” said James Seyffart, an ETF analyst with Bloomberg Intelligence.