Most exchange traded fund issuers say they expect active and passive mutual funds adding ETF share classes to be approved and 93% of standing applicants have requested exemptive relief for dual-share-class structure in their filings through December 2024, according to the inaugural edition of Cerulli Edge—U.S. Product Development Edition.
The Securities and Exchange Commission in March said it was prioritizing its review of applications for firms aiming to offer ETF share classes of its traditional mutual funds. Some fifty applications for such relief have been waiting approval for up to two years.
According to Cerulli, 69% of polled ETF issuers said they either already have filed exemptive relief applications (29%), are planning to file for exemptive relief at a later date (11%), or are considering a dual-share-class structure initiative and following developments (29%).
“SEC filings from various applicants … list advantages including ‘lower portfolio transaction costs,’ ‘greater tax efficiency,’ and an ‘additional distribution channel for asset growth and economies of scale’ when it comes to ETF share classes on mutual funds, as well as ‘efficient portfolio rebalancing’ and ‘greater basket flexibility’ for mutual fund classes on ETFs,” wrote Cerulli analyst Sally Jin in the firm’s recent report on the topic. “Other asserted arguments for the dual-share-class structure point to initiatives in place that reap similar benefits—including cloning mutual fund strategies into ETFs and mutual-fund-to-ETF conversions—that simultaneously respond to investor demand and raise fiduciary challenges that the dual-share-class structure could be better fit to take on.”
Vanguard has been the sole manager able to offer a multi-class share structure under a patent that expired in mid-2023. Other ETF issuers are now seeking to replicate the structure through exemptive relief from the SEC. Asset managers including Charles Schwab, Fidelity, Dimensional Fund Advisors and BlackRock have filed for similar exemptive relief.
In a speech earlier this year at the Investment Company Institute’s 2025 investment management conference, then-acting SEC Chair Mark Uyeda said that ETF market growth over the last twenty years has demonstrated how experimentation can work in asset management. As ETFs now account some 30% of total industry assets, Uyeda said managers should be encouraged to continue improving.
Previously, the SEC has pointed to concerns, including excessive leverage, conflicts of interest, investor confusion, the risk of cross-subsidization, cash redemption and fund expense payment discrepancies, and inequitable voting power, when questioning dual-share-class ETFs, according the Cerulli findings.
On the distribution side, the survey found that ETF managers cite “broker/dealer reluctance to approve/make ETF share classes available on [broker/dealer] platforms (54%), operational complexity of supporting mutual fund and ETF share classes (43%), and asset manager unwillingness to offer ETF transparency to mutual fund strategies (29%)” as impediments to the adoption of dual-share class funds.
Tags: Cerulli Associates, ETFs, Exchange Traded Fund structure, Mutual Funds
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