SEC Permits Dimensional to Offer Dual Mutual Fund–ETF Products 

The Securities and Exchange Commission published a notice on Monday stating it will grant Dimensional Fund Advisors and its affiliated companies an exemption to enable the firm to launch funds offering both mutual fund shares and exchange-traded fund shares within the same portfolio. 

Unless the SEC orders a hearing, it is expected to grant Dimensional’s request following a standard comment period. Interested parties may submit hearing requests within 15 days of publication in the Federal Register. 

Dimensional filed an application seeking relief from several provisions of the Investment Company Act that would otherwise prevent mutual funds and ETFs from being combined into a single fund structure. The requested order permits so-called “Multi-Class ETF Funds,” hybrids allowing investors to choose between traditional mutual fund shares, priced once daily at net asset value, or ETF shares that trade throughout the day on exchanges. 

The SEC’s notice explains that its order provides two types of regulatory relief, including exemptions to allow the ETF class to function under the same rules as existing ETFs and permission for a fund to simultaneously offer an ETF class alongside mutual fund share classes, something current rules do not allow. 

Dimensional argued that the structure gives investors more flexibility. Mutual fund shareholders could benefit from the cost efficiencies and tax advantages of ETF in-kind transactions, while ETF shareholders could benefit from the cash flows and rebalancing that come through the mutual fund channel. 

The proposal also includes an “exchange privilege,” which would allow mutual fund investors to swap their shares for ETF shares under certain conditions. 

“This flexibility can lower total portfolio transaction costs,” said Gerard O’Reilly, Dimensional’s CIO and co-CEO, in a blog post. “Further, we believe ETF share classes could benefit from the existing broad base of investors in our mutual funds, the track record of those mutual funds, and the benefits of scale that come with a well-established fund, including diversification, reduced other expenses, and increased securities lending revenue.” 

Because the hybrid model could create conflicts between classes via its differing transaction costs and dividend schedules, Dimensional pledged to adopt strict oversight. Fund boards would be required to approve the structure initially and review it annually. The adviser would also provide detailed reports and implement ongoing monitoring thresholds to ensure that one share class does not disadvantage the other. 

The SEC has previously permitted ETF share classes on a limited basis, most notably through exemptive orders granted to Vanguard funds in the early 2000s, which the commission noted in its notice. When the SEC adopted Rule 6c-11 in 2019 to streamline ETF operations, it explicitly excluded ETF share classes, citing unique policy concerns. According to the agency, such structures would need to be reviewed individually through applications like Dimensional’s. 

Tags: ETFs, Mutual Funds, SEC