Key takeaways
- In 2025, ETF share classes of mutual funds are a key focus in the U.S., Ireland, Luxembourg and several APAC markets.
- With mutual fund outflows and net new ETF inflows, the share class model has gained popularity as traditional managers recognize the need for an ETF offering.
- Share class ETFs may not enjoy the same tax benefits as other ETFs. In the U.S., the SEC is reviewing an ETF mechanism to reduce capital gains tax by transacting securities in-kind.
- Challenges in adding an ETF share class to a mutual fund include a potential lack of daily portfolio transparency and the loss of certain tax treaties.
- Given the complexities and evolving status of ETF share classes worldwide, issuers need a trusted partner with global expertise to meet investor demands.
Overview
In 2024, ETF assets reached $14.85tn,1 with U.S. ETPs surpassing $10tn,2 European ETPs over $2tn,3 and global active ETFs exceeding $1tn.4 In 2025, a key focus is ETF share classes of mutual funds, gaining attention in the U.S., Europe (Ireland and Luxembourg) and APAC markets.5 The 2023 expiration of a Vanguard patent and exclusion of ETF share classes from Rule 6C-11 led to a surge in SEC exemptive relief filings by ETF and mutual fund issuers.6 In Europe, the focus on ETF share classes increased, with Ireland aligning its treatment to Luxembourg's model, requiring only the ETF share class to be named as an ETF.
What is leading to the increased appetite for a share class model and is it providing the same tax benefits?
With mutual fund outflows and net new ETF inflows, traditional mutual fund managers increasingly need an ETF offering. While passive ETFs dominate, active ETFs, especially in North America, are growing, with active ETFs making up 48% of new launches in 2024.7 Many managers are converting mutual funds to ETFs, with 130 conversions since 2021, 8 including 57 in 2024.9 In the U.S., launching an ETF class within an existing mutual fund is seen as a simpler alternative to full conversion, though it may lack tax benefits. In Europe, share class structures are common, but adding ETF classes to mutual funds has had limited success. Australia's dual-access model is popular for entering the ETF market. Adding an ETF share class can be beneficial for some managers but is not a universal solution. If an asset manager has an existing ETF infrastructure, adding an ETF share class to mutual funds is viable; otherwise, success may be limited.
What are some of the potential challenges to adding an ETF share class to a mutual fund?
- Equitability: Ensuring there is no contagion between ETF and mutual fund share classes may prove difficult
- Tax benefits: Adding an ETF share class to a U.S. mutual fund may not provide the same tax benefits as traditional ETFs. In Europe, combining with a mutual fund could risk losing tax treaties.
- Suitability: It is important to assess if the mutual fund strategy fits the ETF structure, considering liquidity, tradability and transparency.
- Portfolio transparency: Daily transparency is beneficial for ETFs, but some mutual fund managers may resist this level of disclosure.
- Product expertise: Launching and managing an ETF requires expertise in portfolio management, capital markets and operational servicing, unlike traditional mutual funds.
- Performance impact: Mutual funds' cash balances for redemptions can cause cash drag at the ETF share class level.
- Investor charging mechanisms: Swing pricing in mutual funds does not apply to ETFs, requiring a complex model for both share classes.
- Fund and portfolio management: Expertise in security and FX trading is crucial for managing an ETF portfolio.
- Pricing and valuation points: ETFs require current-day NAV calculations, unlike mutual funds, potentially necessitating operational restructuring.
- Operational costs: Combining ETFs and mutual funds creates a complex operating model, increasing costs.
- Costs: ETF-specific costs, such as capital markets and exchange listings, still apply when adding an ETF share class to a mutual fund.
As an issuer, how do I navigate the growing interest in ETF share classes of mutual funds?
Combining traditional mutual funds with ETF share classes may suit certain strategies, but it is not ideal for every asset manager entering the ETF market. Launching a separate ETF range or converting a mutual fund to an ETF might be better options. It is crucial to consider all factors for the best entry point. Given the complexities of ETF share classes and their evolving status globally, issuers need a trusted partner with global expertise. As ETFs gain popularity, issuers should collaborate with a service provider offering comprehensive ETF services, including expertise, product development, market making, liquidity and securities lending. J.P. Morgan uses its infrastructure to support asset managers and investors in servicing ETF assets throughout the trade lifecycle.
References
ETFGI reports the global ETFs Industry gathered a record $1.88 trillion during 2024, ETFGI, January 16, 2025
ETFI reports the ETFs industry in the United States gathered a record $1.17 trillion during 2024, ETFGI, January 20, 2025
ETFGI reports the ETFs industry in Europe gathered a record $270.42 billion in net inflows during 2024, ETFGI, January 20, 2025
ETFGI reports that assets invested in actively managed ETFs listed globally reached a new record of $1.17 trillion at the end of 2024, ETFGI, January 30, 2025
For added details on the rise of active ETFs in the U.S. and asset manager guidance, read: Amid Active ETF Rise, Issuers Seek to Meet Investors Growing Needs, J.P. Morgan, November 2024
For a more in-depth regional analysis of this trend, read: The Active ETF State of Play: A Worldview of the Growing Trend, J.P. Morgan, March 2025
ETFGI reports the global ETFs industry reached a new milestone with 1,988 new products launched in 2024, ETFGI, January 20, 2025
70% of converted ETFs Snag Net Inflows Since 2021, Ingites, January 6, 2025
ETF 2025 - How ETF trends are shaping market growth, EY, February 17, 2025
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