Asset managers are moving to launch ETF share classes of their existing mutual funds following exemptive relief issued by the Securities and Exchange Commission in 2025, but operational hurdles and distribution fee arrangements mean that adoption is likely to be slow.
After Vanguard’s patent covering the structure expired in May 2023, Dimensional was the first to receive the green light last September. The decision set a precedent, and about 90 other asset managers have applied for similar relief.
Jennifer Grancio, global head of distribution at TCW, said her firm is “ready and willing” to issue ETF share classes of its existing open-ended funds but is being held back by logistics. Wealth management platforms still need to figure out how to support an ETF and a mutual fund within the same wrapper, she said. “A lot of the work has barely started. It will happen, but it will take a few years,” she said.
One early example illustrates both the opportunity and the limits of the structure. In December, fixed income firm F/m Investments received approval to make its TBIL U.S. Treasury 3-Month Bill strategy available in both ETF and mutual fund share classes within a single fund. It did so in February, becoming the first to be launched by a firm outside Vanguard, which pioneered the structure two decades ago.
The Investment Company Institute has formed a working group to examine the process, bringing together asset managers, intermediaries, service providers, and the Depository Trust and Clearing Corporation. One of the group’s main concerns is a fundamental technological divide between ETFs and mutual funds.
ETFs and mutual funds operate on completely different systems and do not communicate with each other. That makes coordinating custodians, settlement, and daily NAV accounting across the two structures difficult.
The fee structures of ETFs and mutual funds are another bottleneck. Mutual funds charge 12b-1 fees, but ETFs do not. Brokers for mutual funds are likely to object to firms changing their fee structures.
Daniel Sotiroff, senior manager research analyst at Morningstar, said that in theory a firm would want ETF shares to be priced the same as a mutual fund share. This ultimately falls on the asset managers, “but they have to keep in mind who they are potentially turning off by making a decision one way or another.”
The SEC looked at potential differences in fee structures between share classes when assessing this potential wrapper, asking if there would be subsidization where one class might essentially fund the other. “They want it to be fair and equitable, but I don’t see it working out,” he said. “It is this sort of thing that will mean a fund does not get permission to launch an ETF share class.”
Neither Vanguard nor Dimensional use 12b-1 fee structures, putting them in a strong position. The concept of the ‘interclass exchange privilege’ is also problematic.
According to Sotiroff, this offers a benefit but is particularly hard to do. With several years’ head start, he said, Vanguard has been able to figure it out, “but everyone else is in the dark.”
Even for Vanguard transfers take days to process before ETF shares appear in an investor’s brokerage account.
“It works, but it's not great.”
