E.T.F.s Are Booming. Mutual Funds Want In on the Action.
Asset managers are eagerly awaiting an S.E.C. decision that would allow mutual funds to also trade as E.T.F.s — potentially changing how trillions of dollars are invested.
By Ian Frisch
The modern market for exchange-traded funds has enabled retail investors to easily put money into basically anything.
That includes various cryptocurrencies ($IBIT and $ETH), the investment strategies of Congressional Democrats ($NANC), pet-care brands ($PAWZ), and private equity funds with exposure to Elon Musk’ s SpaceX ($XOVR) and OpenAI ($ARKVX).
Mutual funds wish they could say the same.
But the Securities and Exchange Commission long ago built a firewall between those funds, which are typically accessible through private investment companies, and E.T.F.s, which trade on public exchanges like single stocks.
As E.T.F.s have taken off — growing to encompass over $10 trillion in the U.S. — firms that manage mutual funds have become increasingly unhappy about the forced divide.
Without it, they could essentially “rewrap” the basket of assets in a mutual fund as an E.T.F. with greater flexibility and lower taxes.
Asset managers including Fidelity, Morgan Stanley, BlackRock, and Charles Schwab have spent years trying to subvert the firewall.
And now they’re close to pulling it off — potentially changing how trillions of dollars are invested.
Institutional and retail traders flock to E.T.F.s for a handful of reasons: accessibility (anyone with a brokerage account can buy the ticker), favorable tax structures (in-kind redemptions and lower capital-gains distributions), intraday trading (mutual funds trade only at the end of the day) and generally lower fees.
Mutual funds may sometimes still be a better choice — for, say, 401(k) contributions, because an investor can buy fractional shares.
But if asset managers were able to offer the same group of managed assets in both structures, investors could choose which best fit their circumstances.
It would be like having a reversible T-shirt: yellow on one side and red on the other.
It’s still the same shirt; you’re just choosing the way you want to wear it.
Dimensional Fund Advisors has led the charge.
When Gerard O’Reilly became its co-C.E.O. and co-C.I.O. in 2017, he made finding a way around the firewall between E.T.F.s and mutual funds a priority.
The difficulty: Only one firm had been given an exception to the S.E.C.’s rule — Vanguard, in 2000 — and it had patented the entire structure it used, effectively shutting out competitors from using the same strategy.
O’Reilly didn’t think Dimensional could petition the S.E.C. to rewrite the law, but he did think it might have a shot petitioning for relief from the rules.
After some back-and-forth with the S.E.C., Dimensional officially applied for exemptive relief in July 2023.
(It helped, too, that Vanguard’s patent had expired by then.)
Dozens of other heavy-hitting investment funds followed suit.
Two years later, Dimensional’s application is on the cusp of approval.
“I have directed the commission staff to prioritize their careful review of the many applications filed for this relief, and I look forward to considering their recommendations,” Mark Uyeda said in March, when he was the acting chairman of the S.E.C.
A shift in regulation couldn’t come at a better time for mutual funds: According to Morningstar, 2024 was the third consecutive year of mutual fund outflows, whereas E.T.F.s experienced record inflows; E.T.F. market share, relative to mutual fund assets, has risen from 14 percent to 32 percent.
If the Securities and Exchange Commission grants relief, actively managed mutual funds could maintain their investment strategies while gaining the structural benefits of E.T.F.s.
(Dimensional began its stand-alone exchange-traded funds in 2020 after seeing mutual fund outflows; they now oversee roughly $200 billion in E.T.F. assets and have $786 billion under management, according to the firm.)
An increasing number of E.T.F.s are actively managed.
While many exchange-traded funds, such as $SPY, passively track an index, actively-managed funds, where the basket of stocks tracked by an E.T.F. changes according to an investment strategy, have gained in popularity.
Assets in active E.T.F. products have risen from $171 billion in 2020 to $866 billion in 2024, according to the asset and wealth management research firm Cerulli Associates.
As of June 2025, active E.T.F.s now account for more than half of all exchange-traded funds.
The frenzy for, and public awareness of, E.T.F.s has prompted some well-known analysts, like Cathie Wood and Dan Ives, to lend their name to a thematic bundle of stocks.
Ives recently introduced his namesake AI Revolution ETF, which trades under the ticker — you guessed it —$IVES; it amassed $270 million assets under management in its first 16 days of trading.
The analyst-as-a-brand trend has boomed, so much so that President Trump’s media company, Trump Media & Technology Group Corp., has announced plans to launch a series of E.T.F.s.
If all goes to plan with the S.E.C., the market will see many, many more.
Relief applicants and industry insiders hope to receive an answer soon.
“I have a high level of optimism that before the end of the year, we’ll have the exemptive relief,” Dimensional’s O’Reilly said.
More than 60 asset managers have petitioned for exemptive relief and, based on the S.E.C.’s recommendation, many of them have amended their applications to mimic Dimensional’s.
Once relief is granted, however, it could take months for new offerings to be available to investors.
Still, O’Reilly sees the S.E.C.’s willingness to provide relief under the current rules as a watershed moment in asset management and investing writ large.
”There’s about $10 trillion in assets in E.T.F.s in the U.S. and there’s over $20 trillion in assets in mutual funds in the U.S.,” said O’Reilly.
“What this rule means is that those two pots of assets don’t have to play apart anymore.
They can play it together.”
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