Going into 2026, many corners of the asset management world heralded the pending arrival of ETF share classes of mutual funds as a revolutionary milestone. It was supposed to be the biggest change for the ETF industry in years. The shift was expected to open the floodgates for billions of dollars in mutual fund assets to easily enter the exchange-traded ecosystem. In addition, it was a gateway for firms to enter the fast growing active ETF market. The reality is quite different.
Key Takeaways
- Once hyped as 2026’s biggest ETF revolution, the actual rollout has been exceptionally gradual.
- Nearly 100 asset managers have received approval, but only four have launched products.
- Dimensional Funds pioneered the active multi-class space with its legacy US Micro Cap Portfolio.
While I was openly skeptical from the start about rapid ETF product development, the actual marketplace rollout has been even slower than my conservative expectations. The revolution hasn’t been canceled, but the pace has been remarkably deliberate.
I attended the Investment Company Institute (ICI) ETF conference this week. During one session, industry experts gathered to discuss ETF share classes. The panel — featuring Mike Mundt (Stradley Ronon), Mary Phillips (Dimensional Fund Advisors), Jeff Sardinha (State Street), and Matt Thornton (ICI) — covered the regulatory journey, operational realities, and strategic considerations following a wave of recent approvals.
ETF Share Classes: A Status Check
Share classes were a frequent ETF topic on stage and on the sidelines of the Exchange conference earlier this year as a prime example of continued innovation. Having tracked index funds for over two decades, I find this structural evolution one of the most compelling paradigm shifts in asset management history — even if issuers are moving at a highly measured pace to implement it.
According to the latest industry data tracked by Ben Johnson, CFA, head of client solutions at Morningstar, 104 firms have now filed for exemptive relief to offer ETF shares of their mutual funds (or vice versa). While 90 companies have received the official nod from the SEC and 10 firms have filed portfolios, only four adventurous ones have officially launched multiclass products so far: Dimensional Funds, F/m Investments, Nuveen, and Thornburg.
What This Means for Advisors and Investors
For advisors and investors eagerly looking for ETF versions of their favorite mutual funds, this structural shift promises three major benefits:
- Expanded Wrapper Choice: Investors can access identical strategies through whichever vehicle fits their business model — whether a traditional mutual fund or an intra-day traded ETF.
- Built-in Track Records: Unlike a newly launched standalone ETF, these share classes inherit the long-standing performance history and scale of seasoned mutual funds.
- Structural Symbiosis: The dual structure allows managers to use custom ETF creation/redemption baskets to actively rebalance the entire portfolio, keeping transaction costs lower and maximizing tax efficiency for shareholders across both classes.
However, actually getting these products into portfolios will require immense patience. Clearing regulatory hurdles is entirely different from rebuilding operational infrastructure.
Regulatory Evolution and Governance for Share Classes
Mike Mundt provided the legal foundation, noting that Vanguard’s exclusive patent on the low-fee multi-class ETF structure expired in 2023. While the SEC initially omitted the structure from its regulatory update in Rule 6c-11 in 2019, it left open an exemptive relief process. Following a shift under a new administration, the SEC fast-tracked 90 share class applications.
Mundt emphasized that the granted relief mandates a rigorous, three-part governance framework. Boards must evaluate initial reports detailing quantified benefits, implement ongoing monitoring tied to specific numerical thresholds for cash flows, transaction costs, and capital gains, and conduct annual reviews to certify that the structure remains in the best interest of both individual classes and the fund as a whole.
Issuer Perspective: The Dimensional Case Study
Mary Phillips detailed Dimensional’s strategic path, explaining that the firm chose to “walk before running” by launching standalone ETFs in 2020 and converting seven mutual funds before pursuing the share class model.
Dimensional officially pioneered the active multi-class space by adding an ETF share class — the Dimensional US Micro Cap ETF (DFMC) — to its very first mutual fund. The Dimensional US Micro Cap Portfolio originally launched as a mutual fund back in 1981. According to Phillips, this decision was driven by clear investor demand for varying wrappers, trading efficiencies, and a desire to merge the dual structures to optimize capital gains and tax positioning for all underlying shareholders. DFMC manages $132 million in assets.
Infrastructure and Bottlenecks
Jeff Sardinha provided an ecosystem-wide operational perspective, advising firms to look at share classes as an additional entry point alongside mutual fund to ETF conversions. He highlighted a decision tree for asset managers, noting that strategies must align with transparency, heavy liquidity profiles, and shareholder makeup. For instance, funds with heavy defined contribution or 401(k) assets are poor candidates for total conversions, making a share class an ideal alternative to access traditional brokerage distribution.
Sardinha noted that, despite the high volume of SEC approvals, a limited number of actual products are launching. Most of the industry is adopting a “wait and see” approach, according to Sardinha, to better understand the operational mechanics and systemic risks before committing.
Despite near-term bottlenecks, the panel agreed that the structure has successfully transitioned from a regulatory hurdle to a highly viable, active market reality, even if it is taking longer to materialize than many originally expected.
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