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Breaking Down the Barriers with ETF Share Classes
For many investors, the choice between a mutual fund or exchange-traded fund (ETF) traditionally depended on the use case. For example, assuming the underlying investment propositions and fees were similar, an investor may use mutual funds in their defined contribution retirement plan, such as a 401(k), and ETFs in their personal brokerage accounts. Or investors who value intraday liquidity may go for ETFs, while those who prefer the simplicity of trading at end-of-day net asset value (NAV) select the mutual fund.
But what if one fund could serve both applications? If the investment process is the same, does it make sense to separate mutual fund and ETF investors, forgoing potential benefits from combining a more diverse set of investors into one portfolio?
Recent ETF share class exemptive relief granted by the SEC for select applicants opens that door. This structure enables fund managers to provide both ETF and mutual fund share class access points to funds. The underlying portfolio of securities would be the same, and investors get the flexibility to choose their preferred method of access.
Having ETF and mutual fund investors in a single fund potentially benefits them both. For example, portfolio turnover arising from cash flows into either share class can be used for strategic rebalancing to increase expected returns across both share classes. And all shareholders could stand to benefit from lower transaction costs and greater tax efficiency through rebalancing from transactions in the ETF share class.
Breaking down the barriers between mutual funds and ETFs increases investment choices and potentially improves outcomes—a breakthrough now expanded to benefit more investors.
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Glossary
Exemptive relief: If a fund has an idea for a novel practice or structure that would be prohibited by the Investment Company Act of 1940, it can apply for exemptive relief to the SEC. Applications for exemptive relief orders have historically played an important role in helping the fund industry to grow, innovate, and adapt in ways that benefit investors.
Expected returns: An estimate of average anticipated returns informed by historical data.
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