{"id":3769,"date":"2025-12-31T19:20:26","date_gmt":"2025-12-31T19:20:26","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=3769"},"modified":"2025-12-31T19:31:25","modified_gmt":"2025-12-31T19:31:25","slug":"etf-share-class-approval-for-mutual-fund-complexes-a-true-game-changer","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/etf-share-class-approval-for-mutual-fund-complexes-a-true-game-changer\/","title":{"rendered":"ETF Share Class Approval for Mutual Fund Complexes – A True Game-Changer"},"content":{"rendered":"

The investment industry is entering the final phase of the death of traditional mutual funds with the redeem-at-distributor-only model. What makes us assert this? At the end of November, the SEC formally approved the first applications for mutual fund complexes to offer an\u00a0ETF share class within a single fund structure, following the expiration of Vanguard’s patent. Over 60 other fund sponsors have since re-filed “substantially identical” applications and are expected to receive approval promptly.\u00a0<\/span><\/p>\n

All research 5,000+ stocks and 700+ ETFs updated on <\/span>www.ValuEngine.com<\/span><\/a><\/p>\n

In November 2025, the SEC granted formal approval to\u00a0Dimensional Fund Advisors LP (DFA<\/span>)<\/b>\u00a0to offer both ETF and mutual fund share classes within the same fund structure. This makes Dimensional the second firm, after Vanguard, to use this model and the first to implement it for actively managed products.\u00a0 Following a signal of the imminent approval in September 2025, over 60 other asset managers, including firms like BlackRock, Morgan Stanley, and Fidelity, have re-filed applications for similar exemptive relief.\u00a0 The SEC staff has indicated that these “substantially identical” applications will be reviewed on an expedited basis. This move is expected to lead to a wave of new ETF share classes in the market.\u00a0 To facilitate these conversions, the Depository Trust and Clearing Corporation (DTCC) is enhancing its systems to support automated mutual-fund-to-ETF share class conversions, with industry testing expected in the first half of next year. \u00a0<\/span><\/p>\n

The Investment Company Institute (ICI) highlights significant potential benefits including economies of scale, tax efficiency for shareholders, and greater flexibility for shareholders that will provide more options at lower costs. The SEC’s move is seen as a significant shift towards modernizing the regulatory framework by fostering competition and innovation in the asset management industry.\u00a0 This comes as no surprise to us.\u00a0<\/span><\/p>\n

As early as December 2000, yours truly authored an article for the Dow Jones Journal of Indexes \u201cETFs Can Benefit Active Managers\u201d showing how the structure greatly benefited the managers, the fund company, and its investors not only through tax advantages to the shareholders but through operational efficiencies as well. The ETF structure insulates the fund from needing to carry cash and from daily cash contributions and redemptions.\u00a0 This contributes positively to fund returns.\u00a0 It also means the positions may be liquidated solely on the basis of investment consideration, not capital gains considerations as had been the norm.\u00a0 We updated the original article concepts in 2019 and published it on this website as \u201c<\/span>Leveling the Playing Field for Active Managers<\/b>\u201d. You can read it by clicking <\/span>HERE<\/span><\/a>.<\/span><\/p>\n

Once investors are allowed to migrate their assets into an ETF share class, the question is why wouldn\u2019t all of them? Two major ETF pundits think that the next direction in new filings is down even with the new expedited path because the traditional structure is too entrenched and the smaller mutual fund complexes have no good way of selling their offerings as ETFs.\u00a0 Where have we heard that before?\u00a0 Why is the status quo in the traditional structure continuing to hemorrhage assets? While it is certainly true that many, perhaps most, of these funds will struggle to find customers as ETFs, that will be because they are not as good as competitors\u2019 offerings and in an open-exchange-listed environment, they will eventually have to close.\u00a0 However, if they are losing money in the more expensive and less efficient current structure, they will have to close anyway. The genie is out of the bottle because investors are being educated by peers with access to far more information than ever before.\u00a0 Once any queries are made, there\u2019s no reason to put new money in traditional mutual funds.\u00a0 Another benefit to investors is that once in the ETF share class, they would not be subjected to the 0.75% redemption fee that has become standard in the traditional mutual fund industry.<\/span><\/p>\n

Current ValuEngine reports on all covered stocks and ETFS can be viewed<\/span> HERE<\/b><\/a><\/p>\n

The challenge to fund complexes now becomes competing in an open competition environment with other active and indexed ETFs.\u00a0 Competition of this type with all information easily available to the public and its AI tools like never before greatly benefits end investors.\u00a0 It also makes it nearly impossible for fund complexes to compete for taxable investors with any fund structure that is not an ETF.\u00a0 The only thing that might keep the traditional structure alive for five to ten more years are 401(k), 503b and similar plans.\u00a0 Collectively, they now comprise about 63% of all traditionally structured mutual fund assets.\u00a0 Most of these plans that remain entrenched for now would have to make extensive changes to use ETFs in lieu of mutual funds. Since employees are captive to what their employers offer and the latter group has no great incentive to make changes, that is unlikely to change soon. However, since most plans offer between 10 and 30 investment options altogether and the largest players tend to dominate those options, smaller complexes will have difficulty surviving without converting everything competitive to ETFs via the share-class route while folding funds that are losing money on an operating basis.<\/span><\/p>\n

Currently, according to Statista, there are about 8,000 actively managed mutual funds in the US. According to ETF Global Insight, a leading ETF research firm, there are now more than 2,000 actively managed US ETFs, up from less than 100 in 2019. Given current realities, we are likely to see most of those funds offering ETF share classes (or converting solely to ETFs) within the next three to five years.\u00a0\u00a0<\/span><\/p>\n

Using ETFdb, a TMX VettaFi product, we examine the current state of the active ETF industry.\u00a0 This table consolidates some fast facts as of 09\/30\/2025:\u00a0<\/span><\/p>\n\n\n\n\n\n\n\n\n
Total # of ETFs\u00a0<\/b><\/td>\n4301 (3351 Equity)<\/span><\/td>\n<\/tr>\n
Total Active ETFs*<\/span><\/td>\n2120<\/span><\/td>\n<\/tr>\n
Total Active Equity ETFs<\/span><\/td>\n1706<\/span><\/td>\n<\/tr>\n
\u2026 with 1-or-more years performance<\/span><\/td>\n643<\/span><\/td>\n<\/tr>\n
\u2026 with 3-or-more years performance<\/span><\/td>\n254<\/span><\/td>\n<\/tr>\n
\u2026 with 5-or-more years of performance<\/span><\/td>\n136<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Current ValuEngine reports on all covered stocks and ETFS can be viewed<\/span> HERE<\/b><\/a><\/p>\n

Taking a look at the 136 active US equity ETFs with more than five years of performance, we profile the top seven posting the highest 5-year annualized returns.\u00a0<\/span><\/p>\n