The SEC’s recent and long-anticipated approval of ETF share classes marks a defining moment for the U.S. fund industry, reshaping the fund landscape. As investor demand for intraday liquidity, tax efficiency and lower costs grows, many mutual fund managers are exploring whether an ETF share class could or should be an efficient extension of their existing product line.
In our recent industry webinar, we took a holistic approach to discussing what fund sponsors need to know when evaluating this emerging structure. The conversation highlighted four critical dimensions of the decision: regulatory approval, operational readiness, tax treatment and governance.
Launching an ETF share class is not simply a product design decision — it’s a regulatory one. Under current rules, a mutual fund seeking to offer an ETF share class must obtain exemptive relief from the SEC, since existing ETF exemptive orders do not automatically cover new share classes of mutual funds. The SEC’s review focuses on whether the proposed structure aligns with investor protection principles, addresses potential conflicts between shareholder groups and ensures fair treatment across share classes.
Beyond the SEC approval, managers must assess whether their operational infrastructure can support both mutual fund and ETF share classes under one umbrella.
While a shared portfolio can create efficiencies, it also introduces complexities in accounting, order processing and portfolio management. For example, the ETF’s daily creation and redemption mechanism interacts differently with liquidity than a traditional mutual fund’s cash flows from individual shareholder activity.
Administrators and custodians must be equipped to handle both structures simultaneously, and internal teams need to understand how ETF baskets, settlement cycles and NAV calculation differ from standard mutual fund operations. The technology platforms supporting trade execution and shareholder recordkeeping must also be integrated to maintain consistency and compliance.
The bottom line: operational readiness is not just about having the right systems — it’s about ensuring all service providers, from transfer agents to compliance officers, are aligned around the ETF share class model.
One of the most frequently cited benefits of ETFs is their tax efficiency — largely driven by the in-kind redemption process that allows ETFs to minimize capital gains distributions. But when paired with a mutual fund in a multi-share-class structure, the tax implications become more nuanced. Because capital gains are calculated at the fund level, not at the share class level, managers must evaluate how portfolio activity affects each share class. If not managed carefully, portfolio activity could create unintended consequences for either share class.
It’s also critical to ensure compliance with IRS diversification, qualifying income and distribution requirements to preserve the fund’s regulated investment company (RIC) status.
While the ETF share class structure can deliver tax advantages, success depends on disciplined portfolio management and constant oversight of capital gains exposure.
Governance considerations are equally significant. The board of directors must demonstrate it has carefully evaluated the potential risks and benefits of adding an ETF share class and appropriate controls are in place.
The SEC will expect boards to address issues such as:
Boards should work closely with counsel and compliance officers to document the decision-making process and to monitor the ongoing performance of the share classes post-launch.
Panelists also emphasized the importance of education and communication — both internally with staff and externally with investors. Clarity around pricing, trading and tax implications is essential to avoid confusion among shareholders.
ETF share classes represent a strategic innovation opportunity for asset managers who want to modernize distribution while preserving scale in their existing mutual fund portfolios. However, the structure is not a one-size-fits-all solution.
Firms should begin with a holistic readiness assessment — analyzing regulatory feasibility, operational infrastructure, tax impacts and governance capabilities. Engaging early with experienced advisers can help identify challenges and design an approach tailored to each firm’s business model. To be successful, the ETF share class must fit within your firm’s operational DNA and compliance framework.
With the right preparation and partnerships, fund sponsors can position themselves at the forefront of an evolving market, offering investors greater flexibility while maintaining the integrity of the fund complex.
Thank you to Victory Capital and K&L Gates for presenting with us on our recent webinar: Is an ETF Share Class Right for Your Funds?
Contact Brett Eichenberger, Jay Laurila or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.