The Securities and Exchange Commission’s decision to allow Dimensional Fund Advisors to offer ETFs as mutual fund share classes represents a long-awaited landmark for asset management. But the fund structure could raise thorny questions about platform logistics, fees and conflicts of interest, industry experts say.
Dimensional announced Monday that the SEC published a notice indicating plans to grant its mutual funds exemptive relief to offer ETF share classes — a structure that for years has been allowed exclusively for Vanguard.
Dimensional became the first firm to apply for the exemption in 2023, shortly after Vanguard's patent on the arrangement expired. About 80 other asset managers have made similar applications, Reuters reported, citing the commission.
Industry experts noted the decision’s significance for asset managers and investors, and the obstacles to wider adoption.
"VettaFi has expected the approval of ETF share classes of mutual funds and vice versa to occur in the fourth quarter so the pending approval is on schedule. This will be a key milestone for the industry,” Todd Rosenbluth, Head of Research, TMX VettaFi, said.
“We expect a few firms such as Dimensional Funds and F/M to be the first to move forward as they appear to have done the prep work to position their products to a new audience. While many other asset managers have filed to bring ETF share classes to existing mutual fund portfolios, we expect the vast majority to take a wait and see approach,” he added.
Many will eventually make the move, however, Rosenbluth suggested.
"Once the seal is removed there is no turning back. There are many logistical issues that need to be addressed and asset managers can afford to be patient. We expect the supply of ETFs to gradually increase in the fourth quarter due to the regulatory approval but it has already been an impressive year with hundreds of actively managed ETFs new to market. We expect many more firms in 2026 to look to embrace the ETF share class,” he said.
“It will be interesting to see which mutual fund sponsors actually avail themselves of this and how many will hang on to it as a 'nice to have,’” said Amrita Nandakumar, president of Vident Asset Management.
Work to Be Done
While the approval is a “huge step forward,” there’s much work to be done, she said, noting industry discussion on major operational hurdles, “such as how broker-dealers are going to manage the operational processes and technology that would allow for two different share class structures of the same fund to exist on the same platform.
“There also has not been enough attention paid for the Regulation BI concerns that broker-dealers will face, i.e. do they have an obligation to move all clients invested in the mutual fund share class into the ETF share class if that would indeed be in their clients’ best interest?” Nandakumar asked.
“Finally, given that ETFs do not have 12b-1 and other fees associated with them, what is the incentive for a broker-dealer to allow an additional ETF share class of the mutual funds that are already on the BD’s platform?” she added.
Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, told Bloomberg, “This is one of those things that sounds wonky but has potentially massive implications as millions of investors with trillions in assets sitting in mutual funds will now be able to access an ETF version of that strategy. While there are some operational hurdles still, we see this is a new tributary of flows into ETFs.”
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