Major ETF Development for 2025: Dual Share Classes Take Center Stage

This year marked a significant milestone in the financial world with the introduction of dual share classes, allowing funds to create ETF shares of mutual funds and vice versa. While this concept is not entirely novel, as Vanguard held a patent on ETF shares of mutual funds until 2023 and launched its first more than 20 years ago, it has garnered widespread attention. Over 80 asset managers sought exemptive relief from the Securities and Exchange Commission under the Investment Company Act of 1940, paving the way for the addition of dual share classes. Following Dimensional Fund Advisors’ groundbreaking approval, many other companies have been granted permission to pursue this innovative approach.

This development is poised to revolutionize the fund business, yet the implementation of dual share classes may face certain challenges in the near future. Despite Dimensional swiftly transitioning 13 existing mutual funds to include ETF shares, the broader industry is expected to adopt share classes at a gradual pace. Several obstacles may contribute to this gradual integration:

Firstly, asset managers accustomed to operating within a single vehicle may face logistical challenges in incorporating the other structure, especially in terms of back-office reporting.

Secondly, there may be a shortage of capital among lead market makers to fully support widespread ETF share-class rollouts.

Thirdly, distribution could present a hurdle, as some broker-dealers may be hesitant to integrate ETFs into their systems due to existing compensation arrangements that favor mutual funds.

Moreover, fund boards must carefully evaluate the appropriateness of adding a share class, as not all strategies are suitable for both structures. For example, attaching an ETF share class to a mutual fund with capacity constraints may not be ideal, given that ETFs cannot restrict new investors like mutual funds can.

While many firms have been granted permission to introduce share classes in various formats, fewer are expected to add mutual fund shares to existing ETFs. However, for asset managers predominantly focused on ETFs, there is a compelling rationale to consider branching into mutual funds, particularly for retirement plans. F/m Investments, for instance, is preparing mutual fund shares of its US Treasury 3 Month Bill ETF (TBIL) and Ultrashort Treasury Inflation-Protected Security ETF (RBIL). Whether these strategies can successfully penetrate 401(k) plans remains an unanswered question that may start to unfold in 2026.