The expected exemptive relief for dual-share-class products is an important evolution and will nudge the industry in the right direction of offering more tax-efficient, lower-cost exposures—but this will not happen overnight. New Cerulli research, produced in partnership with Nicsa, explores the challenges and opportunities dual-share-class products offer from the perspectives of both asset managers and financial intermediaries.

The interest in share class conversions comes as ETFs record unprecedented growth while mutual funds have experienced consistent outflows. U.S. ETFs reached a record $10 trillion in assets in 2024, although active ETFs were still a small portion (about $900 billion as of end of year). Dual-share-class product is one way that asset managers hope to have their active exposures gather flows via the ETF structure.

Asset managers perceive dual-share-class relief as an opportunity to launch ETF products that port the mutual fund's performance track record while offering greater tax efficiency. “For asset managers, the dual-share-class option offers the best of both worlds by allowing an investor or their advisor to use their preferred structure and secure the benefits associated with it (e.g., greater tax efficiency of the ETF in a taxable account or net asset value (NAV) certainty of a mutual fund),” says Chris Swansey, associate director.

When dual-share-class products come to market, there will likely be a phased rollout as wealth managers work through the business and operational complexities involved in offering the products. Specific challenges named in the research include Reg BI considerations, operational challenges related to the exchange mechanism for conversion of mutual fund to ETF assets, and business economics, particularly the loss of 12b-1 fees and sub-transfer agency fees.

“A key pain point will be the exchange mechanism. Solving the infrastructure gaps will be costly, resource-intensive, and there are many unknowns,” comments Swansey. “While a wide variety of asset managers have filed to launch dual-share-class products, we expect the near-term use case to be limited to firms either testing the waters or having a business with a lower risk of disrupting intermediary relationships,” he adds.

In the long term, dual-share-class products will move the industry toward offering tax-efficient, lower-cost active exposures within the client’s preferred structure. However, in the short and medium term, the asset and wealth management industries will have to grapple with operational and compliance challenges.

“While unfinished, the rollout of dual-share-class products already has interesting industry takeaways,” says Jim Fitzpatrick, president and CEO of Nicsa. “Asset managers must be selective about which products to offer ETF as a share class, with mindfulness for what intermediaries and advisors want. We look forward to working with asset and wealth managers to identify solutions for the future,” he concludes.