By Ian Salisbury

The Securities and Exchange Commission just made a small change to the legal structure that underpins mutual funds. It could have a seismic effect on fund companies and investors.

On Monday, the SEC granted Austin-based asset manager Dimensional Fund Advisors permission to launch exchange-traded-fund versions of some of its traditional mutual funds, instead of offering both kinds of funds as separate products, as it does now. While DFA still has some details to work out, the decision means that it will be able to offer a single slate of funds, with both traditional mutual fund and ETF versions available to investors.

Traditional mutual funds, which have been around for 100 years, are stock and bond investment pools that allow investors to cash in or out once a day. ETFs, which are more popular and appeared in the 1990s, are similar but trade throughout the day like a stock.

It may sound like inside baseball, but the SEC's latest move could have a profound impact for the mutual fund industry. Around 80 different fund firms have already filed paperwork asking for the SEC to allow them to do the same thing, according to Stradley Ronon, a law firm that tracks the applications.

Most observers believe that having granted permission to DFA, the SEC will soon allow the practice to become widespread.

Fund researcher Morningstar called the decision "groundbreaking," in a note Monday. The change could benefit both investors and fund companies, wrote analysts Dan Sotiroff and Bryan Armour. "Mixing ETFs and mutual funds allows asset managers to provide investors with a single solution, regardless of their vehicle preference."

For investors, the change will likely mean extra convenience. For years, many fund firms have been offering parallel slates of mutual fund and ETFs, requiring investors to choose one or the other, mixing and matching to find a combination of products that meets their goals. Now, investors will be able to settle on a single, favored strategy and pick whichever vehicle makes the most sense for them.

Think of it as shopping for a piece of software, then picking whether to run it on a Mac or Windows computer, instead of having to make sure the program will run on the operating system you have.

Traditional mutual fund investors should also enjoy some tax advantages they didn't before because ETFs have greater flexibility when it comes to registering capital gains. Having an ETF share class would allow traditional mutual funds to eliminate embedded capital gains without passing them out to investors.

The biggest beneficiaries, however, are likely to be traditional mutual fund companies, which have seen assets slowly drain away as investors gravitate to ETFs. Only Vanguard has been able to address that challenge by offering ETF share classes of its index funds, though not its active funds. Other companies haven't been able to follow suit, for complex regulatory reasons.

Over the past decade, investors have pulled a net total of about $3.8 trillion from traditional mutual funds, while pouring about $5.4 trillion into ETFs, according to data collected by the Investment Company Institute, a trade group.

To be sure, some of ETFs' recent popularity has been tied to a parallel trend -- the rising popularity of index funds, often offered as ETFs, over stock-picking mutual funds. But not all of it. Actively managed funds are one of the fastest-growing corners of the ETF landscape over the past several years, grabbing more than $180 billion in new investments in the first half of 2025 alone.

The outflows have weighed on share prices of publicly traded mutual fund companies. Shares of T. Rowe Price have returned about 11% over the past three years, while those of Franklin Resources have gained 24% and the S&P 500 has nearly doubled. Both companies are among those that have filed with the SEC to launch ETF versions of their funds.

In an email Monday, T Rowe Prices said the change would mean "expanded choice for investors." Franklin declined to comment.

While many traditional mutual fund firms have launched active ETFs, most of these have so far been only modest hits. Since the SEC has required these to be separate products, the companies haven't been able to market them based on the records of their flagship traditional funds, which can stretch back decades.

Having parallel slates of similar funds has also made marketing tricky and led to confusion among customers. It also means investors who might want to own a mix of ETFs and traditional mutual funds need to hold them in separate parts of their investment account, an additional hassle.

The SEC's decision Monday, should essentially eliminate these hurdles, letting traditional fund firms offer investors ETF versions of their most popular products. That should level a playing field that has been tilted against mutual fund firms because many investors find ETFs a more convenient investing vehicle.

In the long run, it means ETFs and traditional mutual funds are unlikely to remain, separate competing products, but will eventually blend into a single product that investors can access through whichever channel they prefer.

In other words, the shape of the mutual fund industry, as it has evolved since ETFs appeared 30 years ago, could soon look very different.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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October 01, 2025 02:30 ET (06:30 GMT)

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