Federal regulators are publicly starting the process of giving their blessing to the broader use of a newer kind of share class, and some fundsters are already cheering.

Mark Toshiro Uyeda U.S. Securities and Exchange Commission Commissioner (R)

Yesterday, the folks at the U.S. Securities and Exchange Commission (SEC) issued a public notice of the commissioners' plan to issue an order granting exemptive relief to the creation of an ETF share class of existing mutual funds by Dimensional Fund Advisors (DFA [profile]). However, that plan is pending the possibility of an SEC hearing on the matter; once the 23-page SEC notice (signed by Assistant Secretary Sherry Haywood) is published in the Federal Register, "interested persons" will have 15 days to make a request (in-person, or via snail mail or email) for such a hearing.

The SEC's move comes after the ETFs-as-a-share-class idea has been in use the mutual fund industry for two decades, by a single giant fund firm, Vanguard, which patented the idea in 2005. Other fund firms have pursued the idea for a while, too, especially in recent years after the Low-Cost Leviathan's patent expired in 2023. Surveys earlier in 2025 suggest that most fund firms are planning ETF mutual fund shares, though not for immediate launch.

The preliminary blessing for DFA comes five years after the Austin, Texas-based quantiative asset manager first entered the ETF space, after the SEC under first Trump administration released its simplified ETF rule to allow for easier creation of many ETFs.

Dave Butler, co-CEO of DFA, puts the firm's move to create ETF share classes in the context of DFA's longstanding focus on working with advisors on "helping investors achieve better outcomes."

"Broadening access to ETF share classes represents a meaningful evolution — one that enhances flexibility and supports more-tailored client solutions," Butler states.

Gerard O'Reilly, co-chief investment officer and co-CEO of DFA, highlights the ETF share class' "significant benefits in cost efficiencies, tax management, and greater choice for both mutual fund and ETF investors."

"We are appreciative of the opportunity that this notice of application represents, and grateful for the positive, collaborative interactions we have had with the SEC staff throughout the process," O'Reilly states.

Mark Uyeda, current SEC commissioner and former acting chairman, calls yesterday's notice "a substantive step forward, not just a procedural formality." He describes ETF share classes as offering flexibility to investors, combined with the protection of the '40 Act.

"It is similar to the innovative spirit that led to the creation of the first ETF over three decades ago ... Moreover, it facilitates competition, in that similar relief has been long held by a single asset manager," Uyeda states. "For too long, the artificial divide between mutual fund and ETF share classes has limited investor choice, operational efficiency, and resulted in suboptimal tax treatment."

Eric Pan, president and CEO of the Investment Company Institute (ICI), calls yesterday's SEC "an important step to expanding investor choice and fostering a more competitive marketplace." (ICI is a trade group for fund firms.)

"ICI previously called on the SEC to prioritize approval of such exemptive relief, and we have been working closely with our members, intermediaries, service providers, and other key stakeholders to prepare the industry for this moment," Pan states. "ICI will work close with the industry in implementing the soon-to-be granted relief of this first application and the nearly 80 remaining applications."

Todd Rosenbluth, head of research at TMX's VettaFi, tells MFWire in an emailed statement that the SEC's move on ETF share classes "is on schedule." (VettaFi is an index provider.) Yet he does not predict a rapid flood of new ETF classes right away.

"This will be a key milestone for the industry ... Once the seal is removed there is no turning back," Rosenbluth writes. "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 classes to existing mutual fund portfolios, we expect the vast majority to take a wait and see approach. This is not like the approval of spot bitcoin ETFs in early 2024 when many firms raced out of the gate," Rosenbluth adds. "There are many logistical issues that need to be addressed and asset managers can afford to be patient."

"Now that the SEC has signed off, the real work will begin," Ben Johnson of Morningstar (an investment research firm) reportedly tells Bloomberg. "There's matters of logistics, economics and the economics of logistics to attend to and it will likely be years before we see ETF share classes proliferate and become broadly and easily accessible via conversions of existing mutual fund share class holdings."

Amrita Nandakumar, president of Vident Asset Management, puts the ETF share class progress in the context of Paul Atkins taking over as SEC chair this year. (Vident is a fund firm that also helps power many other firms' ETFs.) Nandakumar, too, calls the news "a huge step forward" while wondering about how fast the idea will actually spread.

"Despite the demand for this relief, 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," Nandakumar tells MFWire in an emailed statement. "There is still quite a lot to be done."

Nandakumar highlights "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." She wonders if B-Ds will have an obligation to switch all clients from traditional, open-end mutual fund shares into ETF shares, and she wonders why B-Ds would allow the use of ETF shares if they're free of 12b-1s and other fees that support the B-Ds. 

Edited by: Neil Anderson, Managing Editor


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