The U.S. Securities and Exchange Commission (SEC) took a major step on Monday by allowing Dimensional Fund Advisors (DFA) to add exchange-traded fund (ETF) share classes to its mutual funds. This decision is expected to accelerate approvals for dozens of other applicants, expand the number of ETFs on the market, and make the products more accessible to everyday investors.
The order, which is still open for public comment, gives DFA the green light to launch the new share class. The move has been long awaited by the investment industry, especially after Vanguard’s patent on the dual-share class structure expired in May 2023. Vanguard was the first firm to pioneer this model more than 20 years ago.
With this change, a mutual fund can now offer its investment portfolio through an ETF share class. This allows investors to buy and sell fund shares throughout the day at market prices via their brokerage accounts, rather than waiting for end-of-day settlement. For many investors, ETFs are attractive because of lower costs, tax benefits, and liquidity.
“This is a win,” said Brian Daly, director of the SEC’s Investment Management Division. “We are increasing choice, reducing expenses, improving tax efficiency, and making ETFs more accessible to retail investors.” DFA co-CEO Gerard O’Reilly also described the approval as a “win for investors,” calling it the start of a potential revolution in the fund industry.
While offering different share classes of mutual funds is not new, adding ETFs will further blur the line between traditional funds and exchange-traded products. Analysts expect many asset managers to follow DFA, likely leading to a surge in ETF launches.
Currently, launching an ETF requires building a new fund from scratch, applying for SEC approval, and waiting years to establish a performance record. The new rule would allow asset managers to leverage existing mutual fund track records, making it easier to compete directly with ETFs.
There are already around 80 applications pending with the SEC for similar ETF share class approvals. Officials said that once DFA’s approval is finalized, the rest will likely proceed quickly. The SEC will also implement safeguards to prevent conflicts of interest and ensure proper disclosures to investors.
Only a small group of asset managers initially filed after Vanguard’s patent expired, with 12 applications submitted by September 2023. However, momentum has picked up sharply after SEC officials confirmed earlier this year that reviews were being prioritized.
“What was slow is moving at light speed,” said Joe Mannon of Vedder Price, speaking at an ETF industry conference in Las Vegas.
