When the Securities and Exchange Commission published its intent to grant Dimensional Fund Advisors approval to offer both mutual fund and ETF share classes within the same fund vehicle, it marked the end of a 20-year monopoly and the beginning of a structural shift in asset management.
The ruling, issued in late September, signals a likely-to-be-formal dismantling of the barrier that kept most fund managers from replicating the model long held by Vanguard since it won a patent in the early 2000s. That patent expired several years ago, but until now, no firm had been permitted to deploy the structure. Dimensional became the first to receive exemptive relief—opening the door for a wave of asset managers to follow suit.
Since the government shutdown began, Dimensional has not yet received final approval
according to a company spokesperson
A Return to Principles
In a statement accompanying the decision, Commissioner Mark Uyeda described the move as “a long-overdue step toward modernizing our regulatory framework for investment companies.” The change, he wrote, reflects how collective investment vehicles have evolved from “being primarily daily-redeemable funds to exchange-traded funds.”
Taken together, the SEC’s approval of Dimensional’s dual-share-class structure marks a turning point in how traditional mutual funds and exchange-traded funds coexist. For the first time in two decades, mutual fund managers other than Vanguard can attach ETF share classes to existing portfolios—offering investors greater tax efficiency and liquidity without abandoning legacy products. Dimensional’s early adoption positions it as the industry’s test case, and while dozens of peers have already lined up to follow, the move exposes operational, pricing and compliance hurdles that will determine how quickly this long-awaited innovation reshapes the $27 trillion U.S. public fund market.
The shift comes against the backdrop of U.S.-listed ETFs’ record $171 billion in inflows in October, pushing year-to-date flows to $1.116 trillion, $34 billion away from a new annual record and on pace for $1.4 trillion by year end, according to data from State Street Investment Management.
‘Good News for the Industry’
Dimensional quickly acted on the opportunity. The firm filed to attach ETF share classes to 13 of its mutual fund portfolios, representing more than $190 billion in assets. The lineup includes large-, small- and mid-cap strategies—ranging from its flagship U.S. Core Equity 1 and 2 portfolios to its Small Cap Value and Micro Cap funds—each carrying expense ratios between 8 and 41 basis points.
Furthermore, in the days following its applications, nearly 80 other firms filed for a dual-share-class structure.
For many in the asset management industry, the decision marked a groundbreaking moment in the constantly evolving world of ETFs.
“This is long overdue,” says Todd Rosenbluth, head of research at VettaFi. “This is good news for the asset management industry and for investors in mutual funds who wanted some of the benefits of an ETF without having to sell and pay taxes as a result.”
Tax efficiency is at the heart of the SEC’s decision and one of the key drivers of interest among fund sponsors. Rabih Moussawi, an associate professor of finance at Villanova University and an expert on fund taxation, says the change could help mutual funds reclaim some lost ground with taxable investors who have migrated to ETFs in search of lower capital gains.
“It’s more fair,” Moussawi says. “Vanguard had an edge for decades by bringing many ETF benefits to their mutual fund share classes. Now all funds will eventually have access to similar advantages, especially those with a lot of taxable clients. Those are the ones that will benefit the most.”
He noted that the ETF share-class structure effectively allows mutual funds to benefit from the in-kind redemption process that has made ETFs so tax-efficient.
“Whenever you buy or sell an ETF, the fund can hand off appreciated securities to an authorized participant instead of realizing capital gains,” he says. “That mechanism means ETFs rarely distribute capital gains. Extending that to mutual fund share classes is a small detail with a huge impact.”
Still, Moussawi cautions that structural fairness does not guarantee a reversal of investor trends.
“In the taxable space, ETFs have already won that battle,” he says. “But in tax-deferred accounts like 401(k)s, mutual funds will likely remain dominant. What this rule does is inject fairness and give firms a way to stabilize outflows.”
For institutional investors, the ETF changes also affect how large pools of capital manage liquidity and exposure, according to Brandon Clark, head of ETFs at Federated Hermes and a former Vanguard executive. Clark says ETFs have become “an integral tool for institutions,” offering flexibility that complements traditional separate accounts.
“An ETF can sit on top of a longer-term mandate as a liquidity sleeve,” he says. “For example, a pension plan might run a separate account for its strategic holdings but use an ETF for short-term funding needs or to manage inflows and outflows over six to 12 months.”
He adds that this structure helps investors externalize transaction costs and preserve the integrity of core portfolios. Smaller institutions and endowments, he says, also benefit from ETFs’ scalability and cost efficiency.
“For city plans or foundations that can’t justify separate accounts, ETFs make institutional-level strategies more accessible,” Clark notes. “They make it easier to manage portfolios holistically and move capital efficiently across exposures.”
Operational, Distribution Hurdles
While the potential advantages are clear, implementing the structure poses logistical challenges. Suzanne Cullinane, managing director of operations at the Investment Company Institute, says firms are still working through how to merge the two product types at a systems level.
“The products today trade on completely different platforms, and there’s never been a reason to bring them together,” she says. “The introduction of a single portfolio now requires that. There’s going to be some operational lift in compiling data, meeting board reporting requirements and integrating distributor engagement.”
Cullinane says the manual “Day 1” model developed by ICI will allow investors to exchange mutual fund shares for ETF share classes, but the process will not be fully automated until the Depository Trust & Clearing Corp. implements new functionality—expected by mid-2026.
Currently, mutual funds and ETFs rely on different transfer agents, custodians and settlement systems. Until the DTCC automates the process, fund shops will therefore need to integrate their systems and counterparties to enable smooth transitions.
In addition, firms are grappling with pricing and distribution questions—particularly how intermediaries will be compensated.
“Firms will start slow,” she adds. “This is going to build gradually, not all at once.”
Case Study of ‘Wait-and-See’ Approach
Some firms are taking a wait-and-see approach. Clark, the head of ETFs at Federated Hermes and a former Vanguard executive, says the benefits of the dual share class structure are “theoretical” for now.
“We haven’t heard investors pounding on our door asking for share classes,” Clark says. “There’s a lot of noise because of the filings, but not necessarily demand. For fixed income, it might make more sense—you can get diversification quickly. But for equities, stand–alone ETFs still offer cleaner benefits.”
He adds that his firm is watching to see if ETF share classes can truly eliminate capital gains in practice.
“Vanguard’s funds had inflows, which made that easier,” Clark says. “Many active funds today face outflows. Whether they can manage to zero remains an open question.”
He sees the rule as part of a broader “evolutionary phase” in fund structure innovation.
“This is one more way to get strategies into ETFs,” he said. “It’s not a race—this will take years to play out.”
Clark, however, says that if demand materializes, his firm will be ready to join in on the action.
Market Implications
The ruling could also influence how firms think about investor access and pricing. Tom Hiller, an attorney at law firm Ropes & Gray who advises on ETF and mutual fund structures, says the new framework could help bridge the cost gap between products while introducing new compliance questions for distributors.
He says asset management firms are also weighing which strategies are suitable for ETF share classes, noting that not all funds are likely candidates.
“If you’re running a strategy with limited market depth or where you need to protect proprietary holdings, a daily transparent ETF share class may not fit,” he says.
Despite the hurdles, most observers agree the SEC’s decision represents a major milestone in the ongoing convergence of mutual funds and ETFs. For asset managers facing persistent outflows from traditional products, the ruling offers a new lever to retain assets and improve tax outcomes without undergoing full fund conversions.
“It’s a good way to give investors access to products they maybe didn’t have before,” Cullinane says. “Anytime you’re opening up investor choice and increasing access, that’s a positive.”
Tags: Dimensional Fund Advisors, ETFs, Exchange Traded Fund structure, Portfolio Management, Regulations, SEC