Everybody wants their fair share.
Northern Trust is the latest asset manager to file for ETF share classes that can coexist alongside traditional mutual fund share classes. This particular filing doesn’t concern Northern Trust’s own funds, but instead mutual funds launched by third-party asset managers on its fund platforms. It’s part of a broader industry push to capitalize on the growing demand for share classes, after Vanguard’s patent expired in 2023. Asset managers have raced to secure regulatory approval for the model, which allows them to offer both mutual fund and ETF share classes of the same fund, giving investors access to ETF benefits such as tax efficiency and intraday trading, while allowing firms to retain existing assets.
“It’s as much a defensive move as it is an offensive one,” said James Seyffart, senior ETF analyst at Bloomberg Intelligence. “If you have a client invested in a mutual fund and they’re considering moving to a competitor’s ETF, you can instead offer an ETF share class of the same fund without triggering a taxable event.”
What’s the Holdup?
Despite a wave of applications over the past three years, only a few asset managers have added ETF share classes to existing mutual funds:
- Earlier this year, Dimensional Fund Advisors added ETF share classes to its US Micro Cap Portfolio and later expanded the structure to its US Small Cap Growth Portfolio. The firm plans to add ETF share classes to 11 additional mutual funds.
- More than 100 other firms have filed for ETF share class structures, and while the overwhelming majority have gotten approval, only 10 have actually attached share classes to mutual funds so far, according to Morningstar.
However, just because they got approved, doesn’t mean the firms necessarily have ETF management capabilities, said Dan Sotiroff, senior manager research analyst at Morningstar. “That’s really where the bottleneck is and why it’s rolling out so slowly,” he told ETF Upside.
Gone Fishing. The opportunity is hard to ignore. While mutual funds still hold more assets overall, investor money continues to funnel into ETFs. Mutual funds ended last year holding almost $31.5 trillion in assets, a 10% increase from the previous year. Meanwhile, ETF assets increased 30% to $13.5 trillion. “There’s money pouring into ETFs in aggregate and tons of new funds coming to market,” Seyffart said. “The fish are borderline jumping in the boat.”