The U.S. Securities and Exchange Commission (SEC) has presented Wall Street’s largest fund houses with a gift-wrapped growth engine. Its recent approval of “ETFs as a share class” could turbocharge an already booming business for ETFs and further increase the gap between the giants and the rest.
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Based on new thematic research by Aniket Ullal, head of ETF Research at CFRA Research, the move represents one of the most significant regulatory changes since the 2019 “ETF Rule.” That previous rule flooded the gates for active ETF launches and contributed to ETF assets well beyond $8 trillion.
Now, as mutual fund companies are permitted to issue ETFs as a share class of an existing fund, the largest managers — think BlackRock Inc (NYSE:BLK), JPMorgan Chase & Co (NYSE:JPM), Fidelity and Dimensional Fund Advisors — are best positioned to take advantage.
“The largest U.S. mutual fund firms are best positioned to gather assets from the decision to allow ‘ETFs as a share class,'” said Ullal, in his latest note. “This is a precursor to likely approval for similar applications from some 80 other mutual fund managers.”
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The Mutual Fund Makeover
The new framework allows mutual fund managers to provide an ETF share class from the same portfolio, a structural hybrid that marries the liquidity and tax efficiency of ETFs with the size of existing fund strategies. But not all will gain equally.
Ullal notes the benefits will cluster at the top.
“Past easing of listing rules by the SEC has tended to benefit the largest managers with strong brands and distribution networks,” he wrote. “Despite 411 issuers listing active ETFs since the ETF Rule, 59% of the current market share has been captured by just five issuers.”
Dimensional, ahead of the rest, aims to introduce its ETF share classes as early as the first quarter of 2026, setting the model for the industry to follow. Its Dimensional U.S. Core Equity 2 ETF (NYSE:DFAC) — already among the largest active equity ETFs — demonstrates how mutual fund DNA can flourish in an ETF wrapper.
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Winners, Losers — And Everyone In Between
For smaller or mid-cap mutual fund managers, the situation is more complex.
Ullal observes that strong performance boutique firms may be able to carve out a niche benefit by tapping ETF share classes as a new distribution mechanism. But for everyone else, especially those with weak brand names and performance, the twin pressures of reduced fees and investor flight to ETFs could be devastating.
“Mutual fund managers that lack both strong brand recognition and past performance will likely face twin threats: downward fee pressure and difficulty in attracting ETF inflows,” Ullal warned.
Essentially, the ETF share class approval is a blessing and a curse. It may assist large players to counterbalance fee compression in mutual funds while providing performance-focused boutiques with new exposure. But for most mid-sizers, it’s another wake-up call that brand muscle, and not alpha alone, is what drives asset flows in today’s ETF age.
The Bigger Picture
The SEC’s recent actions are just one part of a wider trend of modernization, coming after its Sept. 17 approval to permit generic listing standards for commodity-based trusts, a change tipped to quicken the launch of digital asset ETFs.
“The approval of generic listing standards for commodity-based trusts will likely accelerate the listing of alternative crypto ETFs,” Ullal added.
Cumulatively, these moves herald the regulator’s growing comfort with innovation in the $8 trillion ETF universe. As Ullal succinctly framed it, relaxation of listing rules has traditionally spurred the industry, and this new move will be no different.
If ETF 1.0 was all about innovation, ETF 2.0 will be all about consolidation — and survival of the largest.
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