Nate Geraci suggests issuers launch ETFs from a business perspective, not recommending investments.

Nate Geraci suggests issuers launch ETFs from a business perspective, not recommending investments.

The asset management industry is poised for a significant shift as more than 70 firms seek regulatory approval to offer ETF and mutual fund share classes of the same actively managed portfolio. This development, expected to be approved before the end of the year, is set to provide investors with greater freedom and control over their investment choices. According to industry experts, this move will empower investors by offering them a broader array of investment options, allowing them to choose the format that best suits their needs without sacrificing performance or product consistency.

Why the Dual-Share Class Matters

The current limitation of having only one investment format—either mutual funds or ETFs—dictated by the investing platform can hinder investors from accessing strategies that align with their goals. With the introduction of dual-share classes, investors will have the flexibility to access the same strategy in either a mutual fund or ETF wrapper, depending on their account type, tax profile, or platform preference. This flexibility is particularly beneficial for investors who may prefer the tax efficiency of ETFs or the familiarity of mutual funds.

Benefits for Investors

For mutual fund shareholders, converting to ETF shares without triggering capital gains opens the door to lower fees and improved tax efficiency. ETF shareholders, on the other hand, may benefit from the scale that adding a mutual fund share class may enable, as well as access to a simpler, broader product menu. This development could lead to lower fees for clients, as ETF share classes often come with lower expense ratios and fewer tax surprises.

Industry Impact

The introduction of dual-share classes is expected to accelerate ETF innovation rather than slow it down. Fund sponsors will be able to scale innovative strategies across both wrappers without having to launch new portfolios. This structural upgrade is anticipated to enhance efficiency and reach. Additionally, mutual funds will be able to modernize without losing their track records, giving them further life span. ETFs, both new and old, stand to benefit as well, as many strategies currently available only in mutual funds will now have ETF equivalents, providing an on-ramp for ETF investors.

Practical Considerations

While the SEC is expected to approve the new structure late this year, implementation faces practical realities that will delay availability to investors. Funds will need to prepare their operations, and custodians and platforms will 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 shield investors from operational details.

Recommendations for Advisors and Investors

Advisors should start engaging with fund managers to understand which products they plan to expand into dual-share class models. It is essential to inquire about fee structures, conversion processes, and tax strategies. Early engagement will provide advisors with an edge in offering their clients the best possible options. Investors, too, should stay informed about the developments and be prepared to explore the new opportunities once they become available.

Conclusion

The introduction of dual-share classes for ETFs and mutual funds represents a significant advancement in the asset management industry. By offering investors greater choice and flexibility, this development is set to enhance the investment experience and potentially lower fees. As the industry works towards implementation, advisors and investors alike should stay informed and engaged to capitalize on the opportunities that lie ahead.

References

[1] https://www.etftrends.com/1-portfolio-2-formats-future-etfs/
[2] https://www.marketscreener.com/news/soluna-announces-monthly-business-update-ce7c5edfdd81f42d