Asset managers generally trend optimistic about the possibility of future approval for the dual-share-class structure, according to the latest Cerulli Edge—US Product Development Edition.
The firm writes that most ETF issuers say they expect active (74 per cent of applicants) and passive (26 per cent of applicants) mutual funds adding ETF share classes to secure approval and 93 per cent of standing applicants (40 of 43) have requested exemptive relief of this type in their filing as of December 2024.
Cerulli Associates writes that the allure of the dual-share-class structure makes sense for product development, as such an approval would greatly benefit both financial advisors and end-investors in widening the breadth of investment options and simplifying the process for those looking to access an exposure through their preferred structure.
According to Cerulli, 69 per cent of polled ETF issuers say they either already have filed exemptive relief applications (29 per cent), are planning to file for exemptive relief at a later date (11 per cent), or are considering a dual-share-class structure initiative and following developments (29 per cent).
“SEC filings from various applicants explicably list advantages including ‘lower portfolio transaction costs,’ ‘greater tax efficiency,’ and an ‘additional distribution channel for asset growth and economies of scale’ when it comes to ETF share classes on mutual funds, as well as ‘efficient portfolio rebalancing’ and ‘greater basket flexibility’ for mutual fund classes on ETFs,” says Sally Jin, analyst. “Other asserted arguments for the dual-share-class structure point to initiatives in place that reap similar benefits—including cloning mutual fund strategies into ETFs and mutual-fund-to-ETF conversions—that simultaneously respond to investor demand and raise fiduciary challenges that the dual-share-class structure could be better fit to take on,” she adds.
Nevertheless, tremendous regulatory and distribution challenges persist, Cerulli writes, and it remains to be seen whether the SEC would approve these measures and, if so, what exactly that would look like. The SEC has expressed numerous concerns, including excessive leverage, conflicts of interest, investor confusion, the risk of cross-subsidization, cash redemption and fund expense payment discrepancies, and inequitable voting power.
On the distribution side, ETF managers cite broker/dealer (B/D) reluctance to approve/make ETF share classes available on B/D platforms (54 per cent), operational complexity of supporting mutual fund and ETF share classes (43 per cent), and asset manager unwillingness to offer ETF transparency to mutual fund strategies (29 per cent) as major headwinds. Furthermore, 69 per cent of ETF asset managers agree that the uptake of the dual-share-class structure would be more significant for registered independent advisor (RIA) channels, compared to 42 per cent of firms saying the same for B/D home offices.
“Despite these hurdles, half of asset management respondents to Cerulli’s survey remain positive about the possibility of future approval for the dual-share-class structure, though the timeline for such approval remains uncertain,” says Jin. “The growing array of applicants, which make up a strong bulk of the investment industry, may prove a compelling factor,” she concludes.
