The Securities and Exchange Commission is close to allowing dozens of asset managers to blur the lines between exchange traded funds and mutual funds, in a move that would give investors more choice while also raising some potential tax risks.
More than 50 asset managers have petitioned the SEC for exemptive relief in order to offer an ETF share class of an existing mutual fund. Vanguard currently offers this in some cases, operating under a decades-old SEC rule and a now-expired patent, but other asset managers have had to keep strict wall between the two types of funds.
What was seen as a long-term goal for the industry has accelerated in recent months. SEC Commissioner Mark Uyeda said in March that the agency’s staff had been told to prioritize the issue. On March 31, Dimensional Fund Advisors filed an amendment to their application that took into account feedback from SEC staff. Other firms quickly followed up with similar amendments, and at least 45 of the initial 53 filers have since updated their paperwork, according to Morningstar.
“What seems to have happened now is that what we’ve put together is becoming the template for the industry to follow,” Dimensional co-CEO Gerard O’Reilly told CNBC.
What it means for investors
Many ETFs and mutual funds currently offer similar strategies, and in some cases nearly identical investments are offered in both categories of funds from the same firm. There are several key differences between the two, however, including that ETFs can be traded intraday on stock exchanges and typically are more transparent about their holdings.
But perhaps the key difference for investors is the tax treatment.
ETFs are structured so that when one shareholder pulls their money out of a fund, the resulting sale of stocks does not result in capital gains tax for other shareholders, as it often does in mutual funds. One of the SEC’s hesitations in approving these relief applications appears to be concern that co-mingling the funds might result in ETF holders getting hit with an unexpected tax bill.
The risk “is that the ETF shareclass holders are going to end up subsidizing the mutual fund class holders,” said Benjamin Schiffrin, director of securities policy at advocacy group Better Markets. The group is not categorically opposed to the potential changes, Schiffrin added.
The Dimensional amendment includes updated guidelines around oversight of funds that could help navigate issues like tax impact, O’Reilly said. The SEC declined comment.
Source: https://www.cnbc.com/2025/05/20/asset-managers-prepare-for-sec-to-scrap-wall-between-mutual-funds-and-etfs.html