Core Viewpoint - The SEC's recent decision to allow dual share classes for ETFs and mutual funds marks a significant development in the investment landscape, reflecting the ongoing ETF boom and the increasing adoption of ETFs by traditional money managers [2][4]. Group 1: SEC Announcement - The SEC will permit numerous issuers to offer ETF share classes of mutual funds and vice versa, contingent on no hearings being ordered against the applications [2][6]. - This announcement is the SEC's first on the topic since November, when it approved a proposal from Dimensional Fund Advisors [2]. Group 2: Market Impact - The approval of dual share classes is expected to ignite interest among traditional managers who have not previously engaged in the ETF space, providing them access to new channels [3][4]. - The dual-share-class structure offers benefits such as tax efficiency and liquidity, potentially enhancing mutual fund structures and retirement accounts [4]. Group 3: Operational Challenges - Despite the advantages, traditional managers may face logistical and operational hurdles as they adapt to the ETF model, particularly regarding in-kind custom baskets [4]. - Smaller money managers may need to rely on external expertise to successfully launch their funds, while larger managers may already have the necessary resources [4]. Group 4: Future Considerations - Liquidity will be a critical factor to monitor, as many funds will need to maintain higher cash or liquid asset holdings, which could lead to increased underlying fees [5]. - The SEC's notice applies to 30 asset managers, including major firms like BlackRock, PIMCO, and JPMorgan, with petitions for dual share classes potentially being granted as early as January 12 [6].

Core Viewpoint - The approval of dual share classes represents a significant change in the fund industry, but it faces challenges due to incompatible settlement processes established at different times [1][2][3]. Group 1: Dual Share Classes Approval - The Securities and Exchange Commission has approved dual share classes for Dimensional Fund Advisors, with other companies likely to follow suit [4]. - This approval allows some mutual funds to add ETF share classes, enabling investors to exchange shares between the two types [4]. Group 2: Settlement Process Challenges - The settlement processes for mutual funds and ETFs were not designed to work together, complicating trades for intermediaries [2][3]. - An analogy is drawn to the Apollo 13 mission, highlighting the difficulties of integrating systems built by different manufacturers [2][3]. Group 3: Considerations for Intermediaries - Intermediaries must consider how dual share classes will impact investor suitability and fiduciary responsibilities under Regulation Best Interest [4]. - There are implications for compensation structures, including revenue sharing and 12b-1 payments, as well as the integration of dual share class funds into product lineups [4].

On your mark … get set … wait. The SEC’s pending approval of dual share classes may be the biggest story of the year for ETFs, but it may nonetheless be a while before ETF share classes of mutual funds, and vice versa, become available to investors. Following the regulator’s notice on Monday that it is set to greenlight Dimensional Fund Advisors’ request for dual share class exemptions, the company noted that it would launch share classes as soon as it is ready. That firm is certainly well ahead of most o ...