The U.S. Securities and Exchange Commission (SEC) indicated a change for the investment world by paving the way for fund managers to bring exchange-traded fund (ETF) share classes into mutual funds. The action, set to kick-start approvals for several applicants, will likely fuel scores of new ETFs and extend retail investor access to more products.
The suggested order, now open to public comment, directly targets Dimensional Fund Advisors (DFA) and authorizes the company to roll out the new share class. The decision has been highly anticipated across the asset management sector. The announcement is expected to pave the way for other firms to follow. Vanguard was previously the sole entity allowed to implement the dual-share class model under a patent that expired in May 2023.
Under the SEC’s change, mutual funds could offer investors ETF-style shares, allowing them to trade throughout the day at market prices via brokerage accounts, instead of waiting for end-of-day mutual fund pricing. This could provide investors with the liquidity, tax efficiency, and cost advantages associated with ETFs.
Brian Daly, director of the SEC’s Investment Management Division, described the development as a win for investors. “We are increasing choice. We are reducing expenses. We are increasing tax efficiency, and we are making the innovation of the ETF – which is now decades old – more accessible to the average retail investor.” he said.
SEC staff are scheduled to hold a conference call with other asset managers seeking approval for ETF share class, offering guidance on next steps, according to sources. While multiple share classes for mutual funds already exist, often targeting different investor segments or fee structures, the new framework blurs the line between traditional mutual funds and ETFs, making it easier for funds to compete directly with ETFs without the multi-year wait to build a track record.
The SEC noted that about 80 applications are currently in the pipeline for ETF share classes. DFA, the first to file after Vanguard’s patent, recently submitted its third amended application, incorporating regulator-requested changes. The order also includes safeguards to reduce potential conflicts of interest and ensure clear disclosures to investors. “The first approval is the biggest step and biggest lift,” said an SEC official, who indicated that subsequent approvals are expected to move swiftly.
