Long-awaited SEC order lets mutual funds convert to ETFs

The SEC just broke a two-decade deadlock. On Monday, the commission gave Dimensional Fund Advisors (DFA) the go-ahead to create ETF share classes inside its mutual funds, a decision that investors, fund managers, and financial advisors have been chasing for years.

The order, open for public feedback before finalization, lets DFA move forward and puts nearly 80 similar applications next in line. This is the same dual-class structure Vanguard had been running exclusively for over twenty years under a now-expired patent.

This is the first real sign that the SEC is ready to let other firms follow that same dual-structure model. And yes, it’s a big deal. Asset managers have been waiting since Vanguard’s patent expired in May 2023 to offer the same setup. Todd Rosenbluth, who leads research at TMX VettaFi, said bluntly, “There is no turning back.”

SEC clears the path for dozens more ETF share class applications

The change means a single mutual fund can now offer two types of shares: traditional mutual fund shares that trade at the day’s end, and ETF shares that trade all day like stocks. That flexibility removes a big hurdle for retail investors. It brings lower fees, better tax treatment, and real-time trading—without forcing firms to launch a new fund from scratch.

Right now, building an ETF means starting fresh; designing it from zero, waiting for SEC approval, and spending years to develop a performance track record. That’s time and money that many firms don’t have. But now, with this change, mutual funds can just add an ETF share class to their existing portfolios and tap into the ETF market instantly.

“This makes it much easier for mutual funds to compete head-to-head with ETFs,” said Brian Murphy, an attorney at Stradley Ronon who has worked on many of these filings. “They won’t have to wait two or three years to acquire a track record and gather assets slowly over that time.”

By letting existing mutual funds add ETF share classes, the SEC is removing a structural advantage that ETFs have had for years. And this isn’t just a trial balloon. Brian Daly, director of the SEC’s Investment Management Division, told Reuters, “We are increasing choice. We are reducing expenses. We are increasing tax efficiency, and we are making the innovation of the ETF – which is now decades old – more accessible to the average retail investor.”

Gerard O’Reilly, co-CEO at DFA, described the moment as putting the industry at “the forefront of a revolution” in a blog post published after the order dropped.

The industry didn’t expect this to happen so soon. In March 2025, Mark Uyeda, who was acting SEC chair at the time, told an ICI meeting that staff had been told to move fast. That surprised a lot of firms who thought nothing would move until 2026. But DFA’s filing was quickly updated a third time last Friday with final tweaks requested by regulators. And then came Monday’s order.

SEC holds calls with waiting firms as approval process accelerates

Right after DFA got its early nod, Alex Morris, chief investment officer at F/m Investments, confirmed that the SEC had organized a call with asset managers lining up to offer their own ETF share classes. “They will give us guidance on next steps,” Morris said.

The SEC says about 80 similar applications are now pending, and Monday’s action gives them all a clearer shot. The order includes conditions to prevent conflicts between mutual fund and ETF share classes. Firms will be required to make proper disclosures, and the commission will continue reviewing filings one by one.

Offering different share classes isn’t new, as funds have long used various share types for different investors or fees. But this new setup collapses the wall between mutual funds and ETFs. Both share classes will live inside one portfolio. That kind of hybrid fund wasn’t an option for anyone except Vanguard, until now.

An SEC official involved in the decision allegedly told Reuters that this first approval is “the biggest step and biggest lift,” and that once it’s done, the rest of the applications should move fast.

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