Dual Share Classes Are 2025’s Single Biggest ETF Development

This was the year that dual share classes finally got their wings.

The biggest development in years for the open-end fund world is the advent of dual share classes, meaning funds can create ETF shares of mutual funds and vice versa. The concept is far from new: Vanguard until 2023 had a patent on ETF shares of mutual funds, and it launched its first more than 20 years ago. More than 80 asset managers filed this year with the Securities and Exchange Commission for exemptive relief from requirements under the Investment Company Act of 1940 that would allow them to add dual share classes. And, following a back-and-forth the agency had with Dimensional Fund Advisors that led to that firm being the first to get such relief, the SEC earlier this month granted approval for dozens of other companies.

The development, by many accounts, will be transformative for the fund business. But it’s going to take a while for dual share classes to get going.

Are We Having Fund Yet?

It’s been about a month and a half since Dimensional got the SEC’s greenlight to add ETF shares for 13 of its existing mutual funds. As a company that for years has offered strategies in both vehicles, it’s well-positioned for the dual-share-class rollout. But the industry more widely is expected to add share classes to products slowly.

That’s because of a few challenges:

• Asset managers that have focused on one vehicle are having to adjust to add the other to their lines, as things like the back-office reporting of a different structure may be new to them.
• There is likely not enough capital among lead market makers to support ETF share-class rollouts widely.
• Distribution may be a hurdle, with some broker-dealers being slow to add ETFs to their systems, in part because of compensation arrangements with asset managers that favor mutual funds.
• In addition, fund boards have to consider whether it’s appropriate to add a share class, as not all strategies are good candidates for both structures. For example, adding an ETF share class to a mutual fund with capacity constraints may not be ideal, as ETFs can’t be closed to new investors the way mutual funds can.

Swimming Upstream: Among the numerous firms that have permission to add share classes in different wrappers, fewer will be adding mutual fund shares to existing ETFs. But for asset managers that have built most of their business on ETFs, there is a reason to consider mutual funds: retirement plans. F/m Investments, for example, is prepping mutual fund shares of its US Treasury 3 Month Bill ETF (TBIL) and Ultrashort Treasury Inflation-Protected Security ETF (RBIL). Whether strategies can actually make inroads to 401(k)s this way is of course an unanswered question, but we may get some idea in 2026.