A new white paper from the Investment Company Institute (ICI) explores the operational considerations for launching an ETF share class within an existing mutual fund portfolio.
The paper, ETF Share Class Operational Considerations, follows the recent ruling by the Securities and Exchange Commission (SEC) that would allow a single fund to offer both exchange-traded and traditional mutual fund shares. This change provides an opportunity to broaden investor choice, promote efficiency and economies of scale, and enhance competition in the asset management sector.
For this paper, ICI working groups reviewed the implications of this rule in detail, with the intent of understanding what would need to be considered to launch an ETF share class within an existing mutual fund portfolio.
“The ETF share class structure represents a significant modernization in the asset management industry. Investors are drawn to ETFs for their relatively low cost, intraday tradability, transparency, tax efficiency, and exposure to specific markets or strategies,” ICI President and CEO Eric Pan said. “The new share class opportunity is both exciting and raises unique operational challenges. ICI’s goal is to ensure these challenges are well understood and addressed so that firms can innovate while maintaining the highest standards of efficiency and investor protection.”
The ICI working groups are made up of asset managers, intermediaries, service providers, and the Depository Trust and Clearing Corporation (DTCC). The groups focused on several areas, including investor experience, evaluating the potential impact to intermediaries, reporting requirements, operational support for the interclass exchange privilege, and the technology and systems that could affect the development and launch of a dual share class product.
“Both ETFs and mutual funds play an important role in helping investors reach their financial goals, but they operate in different ways,” ICI Chief of Industry Operations Jeff Naylor said. “Those structural differences can give rise to operational challenges when seeking to combine the two vehicles in a dual share class structure. We’re grateful for the hard work of our members and the broader industry to help anticipate and address these concerns as applications are approved and these products take form.”
The analysis stemmed from numerous discussions with a broad cross-section of the mutual fund and ETF ecosystems. The white paper offers an overview of the many areas that industry members might consider when evaluating whether they may launch or support the launch of an ETF share class.