The ETF share class structure represents a significant modernization in the asset management industry. Investors are drawn to ETFs for their relatively low cost, intraday tradability, transparency, tax efficiency, and exposure to specific markets or strategies.
The first thing to be aware of is the SEC has publicly stated that it is in favor of ETF share classes but doesn’t plan to introduce new rulemaking related to the topic, instead relying on Exemptive Applications. The expected relief for funds with both ETF and mutual fund share classes provides an opportunity to broaden investor choice, promote efficiency and economies of scale, and enhance competition in the asset management sector.
The SEC feels that share class ETFs should utilize the Exemptive Application process so it can review the circumstances of each applicant and assess the request against relevant policy considerations.
There have been a number of applications for relief filed with the Commission. A good example is Dimensional Fund Advisors, which stated in their application the belief that the ability of a Fund to offer both Mutual Fund Shares and ETF Shares could be beneficial to the Fund and to shareholders of each type of class. They believe the multi-class structure will allow investors to choose the manner in which they wish to hold interests based on the share class characteristics that are most important to the investor.
Although Fund firms have shown an interest to launch ETF share classes, according to a recent Cerulli survey, distributors and service providers may not be ready and/or able to support them at this time. Distributors cite a lack of clear incentives and guidance from Fund managers, while service providers point to complex conversion processes.
Thirty percent of the distributors surveyed pointed to operational complexity as their biggest constraint, while 20% each identified technology integration, unclear advisor demand and lack of clarity from fund firms.
Beyond the logistics, service providers are concerned about not being aware of fund launch or conversion plans. Six in 10 survey respondents, who work at distributors, said asset managers have not communicated their ETF share class strategies.
According to a recent Cerulli white paper, conversion mechanics are costly and resource intensive. The new structure may carry higher fees than traditional ETFs and mutual funds. Broker-dealers may be concerned that they would be violating Regulation Best Interest if they recommend the mutual fund share class over the ETF version. Some distributors questioned whether ETF share classes offer a clear benefit to anyone other than the fund firms, with firms not being able to articulate a clear benefit to shareholders.
At this time there have been more than 85 applications filed with the Commission. With the end of the government shutdown and the SEC returning to work, it seems likely that many of the applications will be approved. With less than 40 of the applicants planning to launch at this time, many appear to be taking a wait and see strategy, while the information required for board approval is collected and an operating model is developed. We’re also hearing there is a lack of conversion automation, which may take time for the mechanism to be in place since this is not a one-size fits all. With the risk of error with a manual conversion process there’s no reason to rush until a solution is in place.
While fund managers are filing for exemptive relief to offer dual share classes, platforms remain hesitant and service providers are still working through operational challenges. Some distributors raised compliance concerns tied to overlapping product wrappers, one of which an advisor with only a Series 6 license being able to sell mutual funds, but not ETFs.
There are issues to overcome and procedural complexities to address, but the momentum remains strong, and industry excitement continues. Although the survey identifies impediments to ETF conversions, interest has not waned.
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Resources
- Ignites Research. (2025, September 16). Re: Gatekeepers, Not SEC, May be Roadblock for ETF Share Classes
- Cerulli Associates. (2025, May 8). Re: Asset Manager Eagerness for Dual-Share-Class Products is Not Shared by Intermediaries
