Steve Plump, President and CEO of RBB Fund writes that for more than three decades ETFs have steadily transformed from niche trading vehicles and access to cheap beta into core building blocks of global portfolios.
Yet, despite the industry’s massive headline growth, the most consequential phase may just be beginning. With the advent of dual-share-class structures—an innovation allowing an ETF share class to coexist with a mutual fund share class—asset managers are gaining an unprecedented mechanism to migrate assets, create scale efficiencies, and expand product lines rapidly. If adopted broadly, this could unlock exponential growth and usher in a new era of competition across the asset-management landscape.
But there’s a problem: the ETF ecosystem is not structurally ready for the surge of managers set to enter the market. Unless the foundational components mature in parallel – market-making, balance sheet support, and distribution to name a few – the next wave of ETF expansion risks being constrained by its own infrastructure.
The dual-share-class catalyst: unlocking exponential growth
Over the last several years, active managers have been launching ETFs and growing faster than their respective market share. But the dual-share-class model changes the game. Permitting a mutual fund and ETF share class to coexist within the same portfolio opens the door to the trillions of dollars on the ETF sidelines, thus allowing managers to:
● Seamlessly offer both wrappers without duplicating strategies
● Leverage the ETF’s structural tax efficiency
● Achieve scale and the associated performance history instantly by linking new ETFs to existing large mutual funds
● Compete more effectively against incumbents with multibillion-dollar ETF franchises
The result is a potential market expansion not driven by new capital alone, but by the rewrapping of trillions of dollars already in motion. If even a fraction of mutual fund assets migrates to ETF share classes, the industry could experience a growth curve more reminiscent of technology adoption cycles than traditional asset-management evolution.
However, opening the floodgates requires ensuring the riverbanks can hold.
An industry still in its infancy
Despite its maturation, today’s ETF ecosystem is still closer to an adolescent industry than a fully developed financial infrastructure. For all the sophistication surrounding ETF portfolio management, the “plumbing” that keeps funds trading efficiently did not anticipate the scale and complexity that a dual-share-class world introduces. Three foundational gaps stand out:
- Securing lead market makers and liquidity provision
Every ETF relies on lead market makers (LMMs) to maintain tight spreads and orderly markets. But the supply of LMMs willing to support emerging or niche ETFs is finite—and the economics are tightening. As product counts balloon:
● Market makers struggle to allocate resources, including time and people, across an ever-growing universe of tickers.
● Thinly traded or highly specialised ETFs face wider spreads and less consistent liquidity.
● Small or mid-tier issuers find it increasingly difficult to secure top-tier LMM relationships.
In a dual-share-class future, where hundreds of existing mutual fund strategies may seek ETF listings, the strain becomes more pronounced. Liquidity cannot be assumed—it must be built, incentivised, and maintained in a competitive environment where market-making availability is not guaranteed.
- Balance sheets to support custom in-kind baskets (CIBs)
Custom in-kind baskets (CIBs) are the operational backbone enabling ETFs to manage taxes efficiently and are the incentive behind mutual fund managers seeking to enter the ETF market. But executing CIBs at scale requires significant balance sheet support from broker dealers – capacity that is not infinite.
If dual-share-class structures lead to hundreds of additional ETFs tied to legacy mutual funds, the demands, volume and complexity of CIBs activity could multiply. Without deeper balance sheets, automated basket workflows, and broader participation, the industry risks operational slowdowns that undermine one of the ETF wrapper’s signature advantages.
- An evolving—and fragmented—distribution landscape
For decades, mutual funds dominated distribution pipelines through well-entrenched relationships with wire-houses, retirement platforms, and advisors. ETFs have made extraordinary progress, but distribution remains in flux:
● Broker-dealer due-diligence processes remain slow for smaller or newer issuers.
● Platform availability, including shelf-space costs, continue to evolve.
● Many retirement platforms still lack seamless ETF integration.
● Broker/Dealer acceptance of the new ETF share class is still uncertain.
In a world where every mutual fund strategy could have an ETF share class, the distribution challenge becomes existential. Issuers must not only educate advisers but also compete in an increasingly saturated marketplace where attention—not just alpha—determines survival.
A transformational opportunity—if the infrastructure can keep up
The ETF industry stands on the cusp of a structural transformation. Active managers, and Dual-share-class capabilities promise to reshape the asset-management competitive landscape, break down long-standing distribution barriers, and unlock exponential growth. But the industry cannot assume that the current infrastructure will scale automatically.
And as an Issuer it is more important than ever to pick the right partners to make sure you successfully navigate the rapidly changing ETF landscape.
The next decade of ETFs will not be defined merely by innovation in product wrappers—but by innovation in the foundational markets, operations, and distribution networks that support them. If the industry can shore up its structural foundations, ETFs will not simply grow—they will become the dominant investment vehicle of the 21st century.
