Monday Morning Memo: What Happened to ETF Share Classes?

When the patent of Vanguard on ETF share classes expired on May 16, 2023, market observers and participants expected a significant number of new ETFs which are actual share classes of existing mutual funds since the promoters of active managed mutual funds may want to attract investors who are only using ETFs in their portfolios. Opposite to this expectation, the promoters of mutual funds in Europe have been rather shy in using this new feature to enhance their fund distribution strategies.

Nevertheless, the use cases and advantages for ETF share classes are still valid and a further increase of the popularity of active ETFs may lead to a higher adoption of ETF share classes in the future. ETF share classes may increase the operational efficiency of existing mutual funds, as any additional inflows would contribute to the economies of scale of an existing mutual fund. Not to forget that the launch of an ETF share class might be much cheaper than the launch of an ETF.

Another factor that the promoters of actively managed mutual funds who want to enter the European ETF market should consider is the fact that they won’t need any seed capital if they launch an ETF share class. Even better, if their existing mutual fund holds already sufficient assets under management (AUM), they don’t need to gather the AUM needed to surpass the restrictions on minimum AUM of large investors. Hence, they can offer the ETF share class instantly to large institutional investors. Talking about approaching professional investors, the fund promoter might be able to use the performance track record of the existing mutual fund for the ETF share class, which means the promoter does not have to wait until the ETF share class hits the different timelines which professional investors use for their fund analysis. In other words, the launch of an ETF share class might be a fast track for fund promoters to reach new investors.

Additionally, the launch of an ETF share class can reduce the potential to upset existing investors from a pricing perspective, since promoters may use the price model from their institutional share classes as blueprint for the ETF share class. This will also help the fund promoters protect the revenue streams from the existing mutual fund.

With regard to the above, one can conclude that the launch of ETF share classes has so far been somewhat overlooked by those promoters of mutual funds who want to enter the European ETF market. This may mean that we will witness an increasing activity with regard to the launch of ETF share classes in Europe in the near future. That said, to be successful with ETF share classes, the promoters of mutual funds who want to enter the European ETF market still need to do their homework when it comes to a properly working ecosystem for their new ETFs first.

This article is for information purposes only and does not constitute any investment advice.

The views expressed are the views of the author, not necessarily those of LSEG Lipper or LSEG.