One might say progress toward the much-anticipated dual share class structure has been a bit one-dimensional.

That’s because a single company, Dimensional Fund Advisors, has been chosen by the Securities and Exchange Commission as an example for others. That firm, which is in the front of the line for dual share class approval, filed a second amended application late last week that will likely serve as a template for the rest of the industry. The SEC has reached out to other companies in the queue, telling them to use Dimensional’s application for exemptive relief under Section 6(c) of the Investment Company Act of 1940 to offer ETF share classes as the basis for their own. The latest revisions in the application are heightened oversight by fund boards in deciding whether to add ETF or mutual fund share classes to products as well as more disclosure for fund investors.

“The changes in the amended filing are generally consistent with the spirit of the last dual share class exemptive application amendment filings,” said Aisha Hunt, principal at law firm Kelley Hunt. “The structure and exemptive relief framework remain largely intact, with most conditions tracking closely to prior versions.”

Jump in the Line

Numerous fund companies have applied with the SEC for dual share classes or amended their existing applications over the past few weeks. “The SEC essentially told firms to replicate the Dimensional filing as the blueprint,” said Craig Kilgallen, relationship manager at Fuse Research Network. “Now, the firms feel like it’s on the horizon. They’re starting to get in line.” More than 60 fund companies have requested the SEC’s blessing for multiple share classes. Since the agency explained its stance on the Dimensional blueprint in April, at least 43 of them have filed amended applications to account for that, public records show.

Among those filing:

• BlackRock, State Street, Charles Schwab, JPMorgan, Pimco, Morgan Stanley, and others submitted first-amended applications.
• Nine companies turned in new applications: Goldman Sachs; Tweedy, Browne; Harbor Funds; Columbia Management; Exchange Traded Concepts; Tortoise Capital Advisors; Baron Investment Funds; Advisors Preferred; and New Age Alpha.

Boarded Up: Dimensional’s application appears to have been shaped by the SEC’s assessments of numerous requests by different asset managers. A common thread has been that fund boards would assess products’ fit for the addition of either an ETF or mutual fund share class, as not all funds lend themselves to both. “What’s more pronounced in this amended filing is the emphasis on board oversight,” Hunt said, citing explicit requirements for board approval of monitoring funds to identify issues, including conflicts of interest between share classes. “The amendment also includes enhanced disclosure intended to help investors better understand the dual share class structure and the potential for conflicts between share classes, reinforcing the importance of transparency for these hybrid models.”

It’s always good to have a buffer zone.

Defined outcome ETFs, characterized by their caps on gains and limits on losses, are becoming important investment tools for advisors looking to mitigate the impact of market downturns on their clients’ portfolios. Since its inception in 2018, the defined outcome ETF market has grown to more than $60 billion, despite the product’s increased complexity, and the fact that many advisors don’t fully understand how the funds work. Still, the US defined outcome market is expected to expand to $650 billion by 2030, according to recent research from BlackRock and Morningstar in December.

ETFs, Defined

A reason for the recent uptick in popularity is that defined outcome ETFs can be used as alternatives to the standard 60/40 portfolio, according to panelists at ETF Global’s annual ETP Forum in New York City. Newer generations of advisors and their clients are also increasingly likely to use buffer ETFs as part of their more modernized portfolio strategies.

The BlackRock study found that since 2019, nearly 500 defined outcome ETFs have launched, a trend driven by “policy and macroeconomic uncertainty, higher market volatility, and demographic shifts, such as the increasing number of retirees globally.” The research also found:

• Less than 1% of advisors were using outcome ETFs in 2019, compared to more than 10% now. Allocations to the product have also risen 5 percentage points over the past five years.
• Still, nearly 90% of advisors don’t currently use them, according to data that the asset management firm gathered on more than 22,000 advisor models.

International Affairs. There’s also the importance of international diversification, particularly following President Trump’s “Liberation Day” tariffs and the market turmoil that followed, the experts said. Non-US investing has surged with emerging market investments — and allocations in markets like China — taking the place of more standard S&P 500 products.

And while defined outcome ETFs have traditionally been regarded as “competing” with their traditional counterparts, the two can actually end up complementing each other, they added.

Will Rhind has watched the ETF business for more than two decades. He was an original member of the iShares team — back when it was part of Barclays — and he was later CEO of World Gold Trust Services, the sponsor of the now $98 billion SPDR Gold Shares ETF (GLD). He left that company in 2016 to found GraniteShares, which has built out an extensive line of leveraged single-stock ETFs.

Rhind, who has roots in the “Granite City” of Aberdeen, Scotland, joined ETF Upside for a conversation about the burgeoning world of single-stock ETFs. GraniteShares filed last week with the Securities and Exchange Commission for 25 additional leveraged single-stock ETFs. Rhind did not discuss the pending funds, given that they are in the registration period, but he talked about where the firm is headed.

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