The asset management industry is close to a major event. According to Morningstar, more than 70 firms have filed for regulatory approval to offer ETF and mutual fund share classes of the same actively managed portfolio. While approval is likely before year end, VettaFi believes many asset managers will take a prudent approach in product development.
To help advisors and investors understand what this all means, we talked to Alexander Morris, CEO of F/M Investments, and Aisha Hunt, a principal at Kelley Hunt. F/M Investments is an innovative provider of ETFs and is one of the first firms that filed for regulatory approval. We believe Morris and team have been at the forefront of educating regulators on this topic. Meanwhile, Hunt has provided clients and the broader asset management industry with legal advice and perspective for years.
What’s Going on With Fund Share Classes
Why all the hype over ETF and mutual fund shares classes?
This development will give investors greater freedom of choice and empower them to better control their investment outcomes. Most investors today have only one option available to them — mutual fund or ETF — dictated by the investing platform they’re using. This limitation can prevent investors from making the best choice for their individual needs.
Since many investment strategies are offered only in one format, investors may be unable to access strategies that they believe will deliver the performance they seek. Once an issuer can offer both ETF and mutual fund classes, investors will have a broader array of investment options and can choose the format they believe suits them best.
Why does this matter for advisors and investors?
It’s a game-changer for investor choice. Clients will soon access the same strategy in the wrapper that fits their account type, tax profile, or platform — without sacrificing performance or product consistency. Investors will also be able to convert — likely tax free — existing mutual fund assets into an ETF.
What Are the Benefits?
How does this benefit investors?
Mutual fund shareholders could convert into ETF shares without triggering capital gains. This opens the door to lower fees and improved tax efficiency — without giving up the manager or strategy they already trust. ETF shareholders benefit from the scale that adding the mutual fund share class may enable. They also may gain access to a simpler, broader product menu.
Will this lower fees for clients/investors?
In many cases, yes. ETF share classes often come with lower expense ratios and fewer tax surprises. But the real benefit is choice: Investors can select the format that works best for them.
What Is the Industry Impact?
Will this slow ETF innovation?
No, this should accelerate ETF innovation. Fund sponsors will be able to scale innovative strategies across both wrappers without having to launch new portfolios. It’s a structural upgrade for efficiency and reach.
Is this good for legacy mutual funds?
Absolutely. It allows mutual funds to modernize without losing their track records. Mutual fund managers can offer ETF access while keeping their existing investor base intact. Long has the mutual fund been declared dead. Those exaggerations have been far from true. This gives mutual funds further life span.
Is this good for ETFs, new and old?
Absolutely. Many strategies available in mutual funds today lack ETF equivalents. This relief provides an on-ramp for ETF investors to access strategies that are currently available only as mutual funds. Similarly, retirement savers will now be able to access innovation they have been locked out of recently given the general lack of access to ETFs in retirement accounts.
Why would an ETF add a mutual fund share class?
The mutual fund share class enables ETF managers to reach 401(k)s, retirement plans, and institutional platforms that don’t yet support ETFs. For advisors, that means ETF strategies may soon be available inside retirement accounts where they previously weren’t.
What Should Advisors/Investors Do?
When can I convert my/my client’s mutual fund to an ETF?
Although we expect the SEC to approve the new structure late this year, implementation faces some practical realities that will delay availability to investors. After relief is granted, funds will need to prepare their operations. This work is ongoing. Beyond that, custodians and platforms need to prepare the internal scaffolding and plumbing to handle the new tickers and conversions. The industry is working together to deliver a universal experience, and to shield investors from nuanced, operational detail.
What should advisors be doing now?
Start engaging with fund managers. Ask which products they plan to expand into dual-share class models, and how they’re handling fees, conversions, and tax strategy. Advisors who lead early will have an edge.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Read more commentaries by VettaFi
