Will ETF Structure Reforms Reshape the Industry?

The ETF industry has long been a battleground of innovation and efficiency, but recent developments suggest a tectonic shift is underway. Invesco's proposed reclassification of its flagship Invesco QQQ ETF from a unit investment trust (UIT) to an open-end fund structure—set for a shareholder vote on October 24, 2025—has ignited a critical debate: Will structural reforms redefine how ETFs generate revenue, share profits, and compete for assets? For investors, the implications extend beyond QQQ. They raise a pressing question: Could this move pressure State Street to modernize its SPDR S&P 500 ETF Trust (SPY), the oldest and largest ETF in history, and trigger a broader transformation of fund economics?

The QQQ Reclassification: A Strategic Power Move

Invesco's QQQ, a $355 billion behemoth tracking the Nasdaq-100 Index, has historically operated as a UIT. Under this structure, Invesco earned only expense reimbursements, with most fees flowing to third parties like the index provider (Nasdaq) and the trustee (BNY Mellon). The reclassification to an open-end fund will allow Invesco to directly collect a 0.18% management fee—a 20-basis-point cut from the current 0.20% expense ratio. This shift is projected to generate $639 million in annual revenue for Invesco, a 100% increase in retained earnings, while reducing costs for investors.

The move also unlocks operational advantages: securities lending, custom redemption baskets, and dividend reinvestment features. These tools enhance liquidity and tracking accuracy, critical for a fund with a $355 billion footprint. For investors, the benefits are clear: a lower-cost, more efficient vehicle for accessing high-growth tech stocks. For Invesco, it's a strategic pivot from a cost center to a profit engine.

The SPY Conundrum: A Trust Structure's Limits

State Street's SPY, with $655 billion in assets, is the S&P 500's de facto benchmark. Structured as a UIT, it mirrors the S&P 500's full replication strategy, offering broad diversification and a 0.095% expense ratio—the lowest in its category. Yet SPY's trust structure imposes constraints: it cannot reinvest dividends intraday or engage in securities lending. While these limitations haven't hindered its dominance, QQQ's reclassification introduces a new variable.

SPY's current structure ensures a portion of its profit remains within State Street's ecosystem as its trustee. However, QQQ's shift to an open-end model could pressure State Street to explore reforms. If SPY were reclassified, it could reduce fees further, reallocate marketing spend, or adopt tools like securities lending to enhance returns. But such a move would require a cost-benefit analysis. SPY's success lies in its simplicity and stability—features that might be diluted by structural complexity.

Industry-Wide Implications: A Structural Arms Race?

The QQQ reclassification isn't just about Invesco—it's a signal of how structural flexibility can reshape fund economics. Open-end funds offer greater operational agility, aligning with post-2008 regulatory standards and investor demands for transparency. As QQQ's model gains traction, other large UITs may face similar pressure to adapt.

For example, SPY's 0.095% expense ratio already lags behind Vanguard's S&P 500 ETF (VOO) at 0.03%. If State Street were to cut SPY's fee further, it could regain market share. However, this would require sacrificing revenue, which SPY's trust structure currently preserves. The trade-off between cost efficiency and profit-sharing could redefine how ETFs balance investor benefits with sponsor profitability.

Investor Takeaways: Positioning for the Future

For investors, the QQQ reclassification underscores the importance of structural innovation in ETFs. While SPY remains a staple for broad-market exposure, QQQ's transformation could tilt the scales toward high-growth tech exposure with enhanced liquidity. Here's how to navigate the shift:

1. Rebalance Portfolios: Investors seeking growth should consider QQQ's reclassified version, while those prioritizing stability may stick with SPY.
2. Monitor Fee Trends: Track how SPY and other large ETFs adjust their expense ratios in response to QQQ's reclassification.
3. Leverage Operational Advantages: Funds with securities lending and redemption baskets (like the post-QQQ model) may offer superior performance in volatile markets.

Conclusion: The New ETF Paradigm

The QQQ reclassification is more than a regulatory tweak—it's a harbinger of structural evolution in the ETF industry. By unlocking new revenue streams and operational efficiencies, it challenges traditional trust models and sets a precedent for competitors like SPY. While State Street's response remains uncertain, the broader trend is clear: ETFs are no longer just about low fees. They're about innovation, agility, and redefining the balance between investor returns and sponsor profits.

As the October 24 shareholder vote approaches, investors should watch closely. The outcome could signal whether structural reforms will become the new norm—or a fleeting experiment in a market defined by its relentless pursuit of efficiency.