U.S. post-trade professionals are preparing for a wave of new funds after the Securities and Exchange Commission (SEC) approved an exemptive relief allowing an asset manager to launch a dual share class model for mutual funds, specifically by adding ETF share class to existing mutual fund portfolios.
The regulator’s approval of Dimensional Fund Advisors’ ETF share class this week is highly anticipated by more than 80 asset managers who have applied for relief to offer a dual share class model. Investors are increasingly drawn to ETFs due to their low costs, high liquidity and trading flexibility, transparency, and diversification benefits. Today, there are over 4,000 U.S. listed ETF assets under management that top $10 trillion with the potential to add an additional $10 trillion by the end of the decade.
The issue
An increase in the number of ETF share classes could present operational challenges since there is no standard solution for processing conversions specifically and asset types are typically managed in separate, siloed systems, introducing complexities and inefficiencies.
As a result, asset managers must manually process bilateral conversions between broker-dealers and fund managers. This can take up to five or ten days to complete, introducing risks, higher costs and a sub-optimal shareholder experience.
Industry effort
The Depository Trust & Clearing Corporation (DTCC), together with more than 60 industry participants, as well as industry associations including the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA), have been working to define a solution for asset managers, ETF agents and broker-dealers to reduce operational complexity that could impact their ability to scale.
The DTCC will enhance its Fund/SERV platform, the industry solution for processing mutual funds and other pooled investments, to support ETF share class conversions, with testing to start in Q1 2026. A launch is planned for May 2026 subject to receiving any necessary regulatory approvals, to support asset managers as they receive exemptive relief from the SEC. Fund/SERV currently processes more than 85% of the U.S. mutual funds and other pooled investments activity in the U.S.
The planned enhancements are expected to decrease processing times to one day by establishing technical and operational connectivity between mutual funds and ETFs, enabling data sharing among intermediaries, asset managers and ETF agents.
The DTCC says this new capability aims to meet the market demand by supporting faster processing, reduce manual work and streamline operations.
ETF share classes: Operational headaches meet transparency demands
Retail investors’ growing demand for fee transparency and easy product comparison is accelerating the shift toward ETF share classes. As one expert put it, “Investor money talks and investors are saying they don’t like semi and non-transparent products. They’re buying an ETF because they like transparency.” This drive for openness is prompting asset managers to consider new structures, but not without obstacles.
Many portfolio managers remain wary of disclosing detailed holdings, citing intellectual property and competitive risks. Layered onto this is the significant operational complexity in launching ETF share classes: “Launching an ETF share class is akin to launching an ETF sub fund – you need a market maker, an AP, a liquidity provider, even a capital market team.” For operations professionals, balancing these transparency trends with practical delivery is fast becoming a central industry challenge.
