How dual share classes could reshape the future of ETFs

The SEC's green light for dozens of investment firms to offer ETF share classes of traditional mutual funds has opened new avenues for active vehicles built in the tax-efficient structure.

Even before the Securities and Exchange Commission approved the so-called dual share classes for 30 fund companies — including BlackRock, JPMorgan Chase, Fidelity Investments, State Street and Morgan Stanley last month and Dimensional Fund Advisors in November — active ETFs were launching in record numbers. Now that Vanguard's patent for dual share classes has expired and the SEC has ratified more firms' use of the structure with many more expected regulatory blessings on the way, asset managers are betting that financial advisors will be bringing active ETF shares of mutual funds to a portfolio near you.

But that may be easier said than done. Fiduciary planners have fueled the rise of low-cost, passive ETFs for decades. And their clients likely didn't notice the SEC's proceedings, noted Michael Helveston, who began his finance career at Vanguard before launching Exton, Pennsylvania-based registered investment advisory firm Whitford Financial Planning. Helveston frequently teaches clients that ETFs enable them to defer capital gains and trade for rebalancing or other purposes more easily, often at a lower overall cost. His clients' portfolios, however, already mostly comprise ETFs.

"I explain that they're similar to mutual funds, they just trade throughout the day," Helveston said. "I don't get questions beyond that, really."

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Fund companies ready to launch

However, fund companies expect clients facing higher fees and taxes to raise questions about dual share classes. While only 22% of asset managers polled last year by research and consulting firm Cerulli Associates said they either currently offered dual share classes or planned to do so within the next 12 months, another 71% said they were considering rolling them out at some point.

"ETF share classes can be a client service in helping investors transition to a lower-cost, more tax-efficient structure," according to a report released by Cerulli this week. "Dual-share-class [products] may also be the 'holy grail' of future product launches in offering managers access to a wider range of channels."

That could bring further momentum into active ETF products, which surpassed their passive counterparts in fund volume for the first time in June. By the end of the first half of 2025, active ETFs had accumulated $1.1 trillion in assets, drawing 37% of the entire industry's flows between January and June and achieving a "blistering" compound annual growth rate of 56% over a five-year span, Cerulli reported. On the other hand, most of those assets consisted of "a mix of low-cost quantitative solutions and outcome-oriented strategies including ETFs that seek to offer greater income or other options strategies that help fine-tune returns — dampening demand for fundamental active solutions," Cerulli said. 

And it may take time for the dual share classes to make in-roads with advisors, given the fact that Vanguard's patent expired nearly three years ago and competitors couldn't secure their SEC approvals until recent months.

"While more than 80 managers have filed for dual-share-class [products], wealth management home offices have raised concerns about the challenges in supporting such solutions, suggesting slower adoption beyond registered investment advisors," Cerulli's report said. "Cerulli believes that operational challenges and the risk of disrupting relationships with home offices can slow down the rollout, which will in the long term allow managers to offer more tax-efficient [products]."

Regardless, new active ETFs are flooding into the market, to the tune of nearly 1,000 launches last year, according to a note this week by research firm Morningstar, which noted that many were "short-term, trading-oriented" vehicles. The newly launched products amount to 35% of the total ranks of about 2,800 actively managed ETFs based in the U.S.

"To put that in perspective, only roughly 150 passive ETFs were launched in 2025, bringing the total of U.S.-domiciled passive ETFs to about 3,500," Stephen Welch, a senior manager research analyst for equity strategies, wrote in the note. "Meanwhile, just 95 traditional mutual funds launched last year. Active ETFs still have a long way to go to catch mutual funds, of which there are more than 6,300 U.S. listed strategies, but when it comes to new launches, active ETFs are asset managers' vehicle of choice now."

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Questions on dual share classes for the future

Industry experts will be watching closely to see how the dual share classes could affect investors' behavior in coming years. Some active managers may balk at offering ETF classes of their traditional funds, since they frequently "protect their edge by closing their doors to new money as they get bigger" and they may not want to "pull back the curtain on their secret sauce" by disclosing their holdings every day, according to a Morningstar analysis from October by Daniel Sotiroff, a senior manager research analyst, and Bryan Armour, the firm's director of ETF and passive strategies research in North America. 

Furthermore, the dual share classes pose the risk of hitting ETF investors with the taxable capital gains distributions accruing to the mutual fund customers. But that only happened one time during Vanguard's 25-year track record of dual share classes, Sotiroff and Armour wrote. And the dual share classes will enable many more retail investors, such as 401(k) plan participants, to choose previously unavailable ETFs. Existing mutual fund shareholders also enjoy "exchange privileges," which means they can get the ETF versions of their holdings without accepting capital gains distributions.

"Many operational challenges remain for widespread adoption of ETF share classes, and how the ETF ecosystem will adapt to an influx of ETF share classes remains to be seen," Sotiroff and Armour wrote. "Dimensional is already the largest provider of active ETFs in the U.S., so adding share classes should be an extension of its existing capabilities. But there are some unknowns. New providers will still have to develop their ETF management capabilities, and an uptick in new ETF launches could put additional stress on market makers. Furthermore, it's unclear how some of the specialized trades that keep ETFs tax-efficient will be funded. ETF share classes are poised to give investors new options and, in some cases, better capabilities. But investors should understand if there's a clear benefit from a dual-class structure before jumping in headfirst."