On Monday, the U.S. Securities and Exchange Commission (SEC) opened the door for asset managers to introduce exchange-traded fund (ETF) share classes to mutual funds, a development that could lead to a surge of approvals for numerous applicants. This change is anticipated to increase the number of ETFs and make them more accessible to retail investors. This long-awaited decision is specifically aimed at Dimensional Fund Advisors, enabling them to launch these new share classes. The industry has been eagerly awaiting this change, and it’s expected to set a precedent for other firms. Vanguard initially received permission for a similar dual-share class model more than 20 years ago, with its patent expiring in May 2023.
“This marks a significant milestone for the industry,” said Todd Rosenbluth, head of research at TMX VettaFi. “We can’t turn back now.”
The new regulation allows mutual funds to offer ETF share classes, giving investors the chance to engage with the investment portfolio as an exchange-traded product. Investors can buy and sell these ETF shares throughout the trading day at market prices via their brokerage accounts, rather than waiting for mutual fund orders to settle at the end-of-day prices. This shift could make a range of existing funds more accessible to investors who prefer ETFs for their cost-effectiveness, tax benefits, or liquidity.
“We view this as a victory,” stated Brian Daly, director of the SEC’s Investment Management Division, in an interview with Reuters. “We’re expanding choices, reducing expenses, enhancing tax efficiency, and making ETF innovation, which has been around for decades, more accessible to the average retail investor.”
Gerard O’Reilly, co-CEO of DFA, mentioned in a blog post that this positions the fund industry at the “forefront of a revolution.”
The SEC plans to hold a conference call on Monday afternoon with other asset managers seeking approval to offer ETF share classes, according to Alex Morris, chief investment officer at F/m Investments, and two other anonymous sources.
“They will guide us on the next steps,” Morris said. Offering different share classes within the same mutual fund is not a new concept. These often target diverse investor groups or have various fee structures.
The change is expected to blur the lines between ETFs and traditional mutual funds. Many asset managers are likely to follow DFA’s lead, adding ETF share classes to their premier funds, which could lead to a surge in new ETFs competing for investor capital.
Previously, asset managers wanting to offer an ETF had to start from scratch, designing a new fund and filing for SEC approval. New funds couldn’t use the mutual fund’s performance history in marketing materials.
“This change makes it easier for mutual funds to compete directly with ETFs, as they won’t have to wait years to build a track record and gather assets,” explained Brian Murphy, a partner at Stradley Ronon’s investment management practice, who has worked on several share-class filings.
WAITING IN THE WINGS
The approval came faster than anticipated. In mid-March, then-acting SEC Chair Mark Uyeda instructed the staff to expedite the process, surprising many asset managers who didn’t expect progress before 2026. Currently, about 80 applications similar to Dimensional Fund Advisors’ are pending for ETF share class approval, the SEC reported. DFA, the first to apply after Vanguard’s patent expired, submitted a third amendment on Friday with final regulatory adjustments.
The SEC’s order includes safeguards to minimize conflicts of interest between share classes and ensure investors receive proper disclosures, according to an SEC official.
The first approval represents “the biggest step and lift,” the official noted, indicating that the process will likely accelerate for other applicants.
