The ETF-Mutual Fund Mashup Is Almost Legal—And Portfolios May Never Look the Same

A regulatory overhaul is potentially looming—and the ETF market is waiting with bated breath.

According to Morningstar’s most recent mid-year ETF guide, the U.S. Securities and Exchange Commission (SEC) may approve hybrid ETF-mutual fund share-class designs as early as the second half of 2025.

If approved, the change would unleash the floodgates for asset managers to launch new ETF share classes linked to their incumbent mutual funds, enabling new cost savings, tax advantages, and fund design opportunities that could shake the $25 trillion U.S. fund industry.

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The Backstory: Vanguard’s Quiet Advantage

Although Vanguard has been running ETFs as share classes of existing mutual funds under an SEC exemption all along, no other asset manager has had such access since. That exclusivity provided Vanguard with a structural advantage, specifically, tax efficiency and sharing of costs across share classes.

But with the other issuers now eager for similar flexibility, the industry waits anxiously. Asset managers such as Dimensional Fund Advisors (DFA), Fidelity, and Franklin Templeton have all signaled intentions to introduce ETF share classes if and when the regulations change.

What's At Stake: Fees, Taxes, And Fund Families

If ETF share classes are widely available, asset managers may be able to consolidate operations by making both mutual fund and ETF versions available under a single umbrella. That would result in fewer redundant portfolios, more consistent performance by wrappers, and cost savings that would be passed along to investors.

In addition, ETFs are more tax-efficient by nature due to their in-kind redemption feature. Encasing a mutual fund strategy in an ETF wrapper may provide legacy managers with the means to digitize without reinventing the wheel.

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Early Movers To Watch

Although SEC approval is speculative, certain companies are already in a good position for a potential first-mover benefit:

• Dimensional U.S. Core Equity 2 ETF (NYSE:DFAC): Initially a mutual fund approach, which now exists as an ETF. Though not an official share class, DFAC demonstrates how companies such as DFA are adapting old approaches to ETF status, and would almost certainly switch to share classes if that became an option.

• T. Rowe Price Blue Chip Growth ETF (NYSE:TCHP): A classic mutual fund strategy ported into ETF format. T. Rowe has hinted it may leverage share-class flexibility to simplify its product shelf. “It's unlikely that we would utilize ETF as a share class for certain of our funds, but we've identified a number of them where we think it's an attractive opportunity,” Rob Sharpe, CEO, T. Rowe Price, had explained in the Q1 2025 earnings call.

• JPMorgan Equity Premium Income ETF (JEPI): While not born from a mutual fund, JEPI's explosive growth has made it a model for what well-managed active ETFs can do, offering a benchmark for fund firms contemplating share-class ETFs with income-focused strategies.

What It Means For Investors

• Cheaper costs: Shaded operational infrastructure translates into lower-cost funds.
• Better tax efficiency: ETF structures provide more favorable tax treatment compared to mutual funds, especially for long-term investors.
• More options: The ETF strategy universe may double overnight.

What’s Next: The SEC’s decision will depend on whether the share-class design presents any risk to ETF shareholders, especially in times of stress when flows could diverge between classes.

Nevertheless, market observers are hopeful. With ETFs already outperforming mutual funds in growth and popularity, regulatory innovation may be the spark that ignites a new wave of interest.

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