The ETF industry is entering a pivotal period of structural change.
The U.S. Securities and Exchange Commission (SEC) has recently approved an exemptive relief application that allows an ETF to operate as a share class of a mutual fund, marking what could be the beginning of a long anticipated regulatory shift.
This move, while highly technical, could have sweeping implications for asset managers, advisors, and investors alike.
What Is “ETF as a Share Class”?
Under the current structure, ETFs and mutual funds must be created and operated as entirely separate legal entities, even if they follow the same investment strategy.
For instance, a fund manager offering both a mutual fund and an ETF version of a strategy must launch and maintain two separate portfolios, with two sets of trading, and regulatory filings.
The proposed regulatory change would allow an ETF to be introduced as another share class of an existing mutual fund, similar to how institutional or retail shares all exist within the single mutual fund structure today.
This structure is not entirely new.
Vanguard pioneered the model years ago after receiving exemptive relief from the SEC, but that relief was unique to Vanguard and has not been available to other asset managers.
That is about to change.
On November 17th, 2025, Dimensional Fund Advisors became the first firm since Vanguard to secure exemptive relief for the dual share structure after a 28-month application process.
78 other firms have filings pending, signaling how quickly the model could scale once additional approvals follow.
Why This Could Be a Game Changer
The implications of ETF share class approval go far beyond product structure.
This move has the potential to reset expectations for efficiency, scale, and tax performance. Here’s why it matters:
Tax Efficiency
- ETFs benefit from in-kind redemptions, which allow them opportunities to avoid future taxable capital gains distributions by not having to sell portfolio assets to meet redemption needs.
- Mutual funds, in contrast, must distribute capital gains realized through the sale of portfolio assets to support redemptions, thus impacting shareholders’ tax bills.
- If a mutual fund adds an ETF share class, the entire fund could benefit from this tax-advantaged treatment.
Operational Efficiency
- One portfolio, one trading desk, multiple wrappers.
- Opportunities for reduced operational overhead, more efficient trading, and fewer redundancies.
- Potential for lower costs and economies of scale, which may benefit both shareholders and asset managers.
Distribution Flexibility
- Asset managers can access both ETF and mutual fund distribution channels through a single fund.
- Eliminates the need to seed new ETFs or replicate strategies across separate vehicles.
- Easier entry into the ETF market for traditional mutual fund managers.
Implications for the Broader ETF Industry
Many asset managers are already exploring how to adapt their existing mutual fund offerings into dual-share-class structures. This approach would allow them to maintain fund performance history and structural continuity while adding an ETF wrapper, which could be significantly advantageous when compared to launching a new ETF from scratch.
The change is also expected to lower the barrier to entry for firms that haven’t yet entered the ETF space. Traditional mutual fund managers, especially those with limited ETF infrastructure, will be able to offer ETF access without rebuilding their operations from the ground up. This could lead to a surge of new entrants and increased competition across the ETF ecosystem.
At the same time, service providers across the industry, from custodians to fund administrators and trading desks, will need to adapt.
Dual-share-class structures demand unified infrastructure that can handle both mutual fund and ETF mechanics seamlessly. The shift will likely accelerate innovation and integration among these critical backend systems.
From a regulatory perspective, the SEC will continue to play a key role in shaping how this new structure is implemented. Issues such as fee consistency, equitable treatment of shareholders across classes, and safeguards against tax arbitrage are likely to be scrutinized closely.
Looking Ahead
With Dimensional now securing the first exemptive relief approval since Vanguard, the path is open for more potential approvals as the SEC moves through its queue of 78 applications. We believe this moment represents one of the most significant changes to the fund structure landscape in decades.
For forward-thinking asset managers, now is the time to prepare, plan, and partner with providers who understand both the opportunity and the operational nuance.
At Tidal, we view this potential regulatory change as an inflection point.
Tidal Financial Group stands ready to help navigate this evolution, by combining our comprehensive ETF platform with our deep experience in fund structuring and innovation.
Want to explore how your fund could evolve in the next wave of ETF growth? Let’s talk.
