The Securities and Exchange Commission finally brought dual share classes to the masses … some of them, anyway.
The SEC announced last week that it will allow dozens of issuers to offer ETF share classes of mutual funds and vice versa, so long as the SEC doesn’t order hearings against the applications. The move is the agency’s first announcement on the topic since November, when it approved Dimensional Fund Advisors’s proposal. Despite being largely expected, experts said the decision underscores the ongoing ETF boom and the expectation that ETF adoption by traditional money managers will increase.
“Managers who were traditionally not in the ETF space, are now very much so in the ETF space,” said Rich Lee, head of program trading and execution strategy at Baird. “Approval for the share class [is] really going to be a huge igniter … It helps these managers get access to a channel that maybe they’ve not traditionally been in.”
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The primary benefits of a dual-share-class structure include tax efficiency and liquidity, as the benefits of an ETF wrapper are brought to mutual fund structures, and potentially to retirement accounts. But it won’t all be smooth sailing from here, Lee said, since many logistical and operational hurdles remain for traditional managers who haven’t had to learn the ins and outs of ETFs before. “[Some managers] may not be as familiar, or may not have direct firsthand experience with in-kind custom baskets,” he said, referring to how issuers can create baskets of securities and transfer them directly to whoever is redeeming shares, thus reducing taxes. “That’s going to be something managers are going to have to get comfortable with. It’s a new tool in their arsenal.” While larger managers likely have existing products or the resources in-house, smaller money managers may have to rely on the expertise of others to get their funds off the ground, he added.
According to the SEC’s notice:
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Petitions to offer dual share classes will be granted as early as Jan. 12, since that is the deadline for the SEC to order a hearing on any given application.
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The notice applies to 30 asset managers, including BlackRock, F/m Investments, PIMCO, JPMorgan, Fidelity, Morgan Stanley and others.
Solid, Gas, Liquidity. Liquidity will be something to watch, Lee said, since many of these funds need to hold more cash or other liquid assets, which could cause an increase in underlying fees. “There’s more listed tickers for ETFs out there in the marketplace than there are actual single stock tickers,” he said. “It will be interesting to see what the impact of this influx of active managers doing custom in-kind baskets … has for balance sheets.”
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