The Exemption for Dual-Class Share Products Is a Major Development and Will Drive the Industry in the Right Direction to Offer More Tax-Efficient and Lower-Cost Exposures, but It Will Not Happen Overnight, According to a New Study by International Consultancy Cerulli, in Collaboration With Nicsa
Interest in share class conversions comes at a time when ETFs are experiencing unprecedented growth, while mutual funds have seen consistent outflows.
Specifically, U.S. ETFs reached a record $10 trillion in assets in 2024, although active ETFs remained a small portion (around $900 billion by year-end). The dual-class share product is a way in which asset managers hope their active exposures will attract inflows through the ETF structure.
Asset managers view the dual-class share exemption as an opportunity to launch ETF products that carry the performance track record of the mutual fund while simultaneously offering greater tax efficiency.
“For asset managers, the dual-class share option offers the best of both worlds, as it allows the investor or their advisor to use their preferred structure and benefit from the associated advantages (for example, the greater tax efficiency of an ETF in a taxable account, or the certainty of the net asset value (NAV) of a mutual fund),” said Chris Swansey, associate director at Cerulli, the Boston-based consultancy.
When dual-class share products enter the market, a gradual rollout is likely, as wealth managers work through the business and operational complexities involved in offering these products.
Among the specific challenges cited in the Cerulli and Nicsa study are considerations related to Reg BI, operational challenges linked to the redemption mechanism for converting mutual fund assets into ETFs, and business economics, particularly the loss of 12b-1 fees and sub-transfer agency fees.
“One of the main issues will be the exchange mechanism. Solving infrastructure gaps will be costly, resource-intensive, and full of unknowns,” commented Swansey. “Although a wide variety of asset managers have applied to launch dual-class share products, we expect short-term use to be limited to firms that are testing the waters or have a business with lower risk of disrupting intermediary relationships,” he added.
In the long term, dual-class share products will lead the industry to offer active exposures that are tax-efficient and lower-cost within the client’s preferred structure. However, in the short and medium term, the asset and wealth management sectors will have to face operational and compliance challenges.
“Although it is not yet complete, the rollout of dual-class share products already has interesting implications for the industry,” said Jim Fitzpatrick, president and CEO of Nicsa.
“Asset managers need to be selective about which products to offer as ETFs in the form of a share class, taking into account what intermediaries and advisors want. We look forward to working with asset and wealth managers to identify solutions for the future,” he concluded.
