WealthManagement.com: How ETF share classes could transform investor access

The evolving landscape of investment vehicles, paired with a recent regulatory shift, stands to create new opportunities for wealth managers. One of the most significant possible developments on the horizon is broader approval of ETF share classes within mutual funds, which would widen the breadth of investment options available to investors and meet rising demands for investment flexibility and personalization. Understanding why regulators are considering this change, the implications for the broader investment ecosystem and how wealth and asset managers can prepare to offer investors more choices is critical.

By combining the benefits of mutual funds and ETFs into a single investment product, investors can benefit from the long-term viability of each vehicle. Regulators are considering this change to offer investors greater flexibility and enhance the efficiency of fund management. The vehicle itself won’t be the right choice for every investor, but for the right person, there are several benefits. With the ability to choose a mutual fund or ETF, investors can benefit from tax efficiency and scale by investing in a single pool of assets.

ETFs generally offer greater tax efficiency due to their ability to process redemptions in-kind, reducing taxable events for shareholders. ETF class shares will trade intra-day at market prices, unlike mutual fund shares, which are priced only at market close. A dual-class structure could eliminate the need for separate trust and oversight frameworks, simplifying fund governance. The model could also draw additional investment into U.S. equity markets by expanding investor access and improving cost efficiency.

These changes may help mutual funds retain market share by eliminating the need and expense to set up a clone ETF. One fund instead of two is just more economical. For sponsors, ETF share classes represent an efficient mechanism to retain AUM, reduce product duplication, and remain competitive with pure-play ETF managers.

To prepare for this potential shift, wealth managers should take proactive steps. While it’s likely that many investors have at least a familiarity with ETFs, educating them on the specific benefits and mechanics of ETF share classes will be crucial, particularly in terms of cost, liquidity and tax efficiency. Firms should assess their current product lineup to determine which mutual funds may benefit from an ETF share class structure. Wealth and asset managers need to keep an eye on potential rulings and industry responses.

Partnering with asset managers may allow wealth managers to position themselves ahead of the shift. Additionally, firms must ensure their trading, reporting, and compliance systems can support dual-class fund structures seamlessly.

If approved, this could mark a pivotal shift in how mutual funds and ETFs coexist and enable a more seamless investment experience, removing barriers between traditional and exchange-traded fund structures, and ultimately benefit client portfolios and servicing. As the regulatory review unfolds, wealth managers who proactively prepare can be well-positioned to capitalize on this emerging opportunity.