ETF share-class rollout lags despite 90 SEC approvals

About 104 firms have applied for exemptive relief to offer ETF share classes of mutual funds. Regulators have cleared roughly 90 of those applications, but only four firms — Dimensional, F/m Investments, Nuveen and Thornburg — have launched multiclass products so far.

The topic drew attention at the Investment Company Institute ETF conference, where a panel of industry legal, operations and trade-group representatives reviewed the regulatory path, technical hurdles and timing choices for issuers. Panel members included Mike Mundt of Stradley Ronon, Mary Phillips of Dimensional Fund Advisors, Jeff Sardinha of State Street and Matt Thornton of the ICI.

Legal and regulatory history has shaped the pathway. A patent on a low-fee multi-class ETF structure expired in 2023. The SEC did not include the structure in a 2019 update to Rule 6c-11, leaving a route for exemptive relief. Under a later regulatory approach, the agency began granting approvals for individual applications at scale.

Mike Mundt outlined the governance conditions tied to many approvals. Boards must review initial reports that quantify the expected benefits of adding ETF share classes. Managers must implement ongoing monitoring linked to numerical thresholds for cash flows, transaction costs and capital gains. Firms must complete annual certifications that the arrangement remains in the best interest of the fund and each share class.

Dimensional’s rollout illustrates the staged approach some firms are taking. Mary Phillips described a strategy of ‘‘walk before running’’: the firm launched standalone ETFs in 2020, converted seven mutual funds to ETFs and later added an ETF share class to its legacy US Micro Cap Portfolio. The Dimensional US Micro Cap ETF (DFMC) manages about $132 million and is attached to a mutual fund first launched in 1981. Phillips cited investor demand for different wrappers, trading efficiency and tax positioning as drivers for the conversion.

Jeff Sardinha provided an operational view. He characterized share classes as an alternative to full mutual fund-to-ETF conversions and recommended that managers evaluate each strategy against transparency, liquidity and shareholder mix. Funds with large defined-contribution or 401(k) holdings are often poor candidates for full conversion, making a share class a practical route to access brokerage channels. Sardinha said many managers are taking a wait-and-see stance to study creation/redemption mechanics and potential systemic risks before moving more assets.

Panelists identified concrete structural benefits for advisors and investors: the ability to choose between a mutual fund or ETF wrapper for identical strategies; ETF share classes keeping an existing fund’s performance record and scale; and the ability to use custom creation and redemption baskets to rebalance portfolios, which can reduce transaction costs and affect tax outcomes for shareholders.

Panelists noted that regulatory clearance has expanded rapidly, but converting approvals into full operational readiness has been slower. Operational work and board governance remain key constraints on broader adoption.