A dual share class structure lets a single registered fund offer both a mutual fund share class and an exchange-traded fund (ETF) share class on top of one shared investment portfolio. Investors in either class own an interest in the same holdings, are served by the same portfolio management team, and inherit the same performance track record; only the wrapper, and how an investor accesses it, differs.

Regulatory Action Around Dual Share Classes

For more than two decades this structure was the exclusive property of Vanguard, protected by a patent that expired in May 2023. The industry expected rapid movement once the patent lapsed, but each firm had to independently pursue exemptive relief from the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. Regulatory clarity arrived in stages through late 2025 and into 2026:

• November 2025: The SEC granted the first non-Vanguard approval, to Dimensional Fund Advisors, covering 13 existing equity mutual funds and marking the first exemptive order to permit an actively managed dual share class fund.
• December 2025: The SEC signaled it would grant similar relief to roughly 30 additional firms, including BlackRock, JPMorgan, Fidelity, State Street, and Morgan Stanley, with F/m Investments among the first notified.
• By May 2026: Roughly 100 asset managers had filed for exemptive relief, and most had been approved, though actual implementation timing varies widely by firm.

Approval, however, is only the first step. Live launches followed on a separate timeline:

• February 2026: F/m Investments became the first ETF issuer to bring a dual share class fund to market, adding a mutual fund class (TBFMX) to its existing ultra-short Treasury ETF (TBIL).
• March 2026: Dimensional listed the Dimensional US Microcap ETF (DFMC), the first actively managed ETF share class carved out of an existing mutual fund, a milestone many in the industry treat as the real starting gun for the model.
• June 2026: Fidelity confirmed plans to bring its first ETF share classes to market, with BlackRock, State Street, and others progressing through their own pipelines.

Each fund operates under a written “multiple class plan” adopted pursuant to Rule 18f-3, approved by the fund’s board. That plan governs how expenses are allocated between the mutual fund and ETF classes and gives the board its ongoing framework for policing fairness between them.

Why Asset Managers Are Embracing Dual Share Classes

The rise of ETFs has forced traditional asset managers to rethink how they bring products to market. Flows have told a stark story: in 2024 alone, mutual funds shed roughly $451 billion while ETFs took in a record $1.1 trillion, and by 2025 new active ETF launches were outpacing new traditional mutual fund launches for the first time. Historically, capturing ETF demand meant launching an entirely separate fund, specifically duplicating operations and potentially splitting assets and track records between two competing products.

Dual share classes offer an alternative. By allowing a mutual fund and ETF class to coexist within the same fund, managers can potentially:

• Retain existing mutual fund assets, including retirement-plan relationships that generally cannot yet move into an ETF wrapper
• Expand into the ETF market without seeding a new portfolio or starting a new track record
• Carry forward an established performance history, which is a meaningful factor in adviser and institutional due diligence
• Increase scale by combining assets across both wrappers, which can support lower overall expense ratios
• Reach multiple distribution channels (brokerage platforms, RIAs, and retirement recordkeepers) through a single investment strategy

The Benefits

The commercial rationale for managers is straightforward, but the structure also creates benefits that flow to investors directly:

• Wrapper choice without strategy compromise: The same adviser’s clients, one in a brokerage account and one in a workplace retirement plan, can hold the identical strategy through whichever share class fits their account.
• Potential tax efficiency for mutual fund shareholders: Because the ETF class can rely on in-kind creation and redemption, it may absorb some of the portfolio’s turnover-driven capital gains, which can reduce distributions across the whole fund, including to mutual fund holders who never touch the ETF.
• Lower due-diligence friction: The ETF class inherits years or decades of live performance history rather than launching as an unproven fund.

The Challenges Behind the Opportunity

Unlike standalone mutual funds and ETFs, both investor groups here share the same underlying portfolio. That creates operational, governance, and oversight questions that regulators and industry participants are still working through in practice, now that funds are actually live rather than merely approved.

1. Cost Allocation
Mutual fund and ETF investors interact with the fund differently: mutual fund investors subscribe and redeem directly with the fund, while ETF investors generally trade shares on an exchange. Those differences can create costs that originate in one share class but potentially affect the entire fund. Regulators have placed heavy emphasis on ensuring neither investor group unfairly subsidizes the other, and managers are building increasingly sophisticated monitoring and reporting frameworks to demonstrate equitable treatment across both classes.

2. Governance and Oversight
Fund boards are expected to play a more active role. Managers must be able to demonstrate that both share classes continue to operate fairly under the multiple-class plan and that the structure remains in the best interests of all investors, creating additional oversight requirements and increased scrutiny of how these funds are run.

3. Operational Complexity
Supporting two vehicles within one fund requires new infrastructure across fund accounting, transfer agency, reporting, and compliance. Much of this remains under construction rather than finished:

• The Depository Trust and Clearing Corporation (DTCC) has been enhancing its Fund/SERV platform to automate mutual fund-to-ETF conversions; industry testing began in 1Q26 and an initial rollout followed in mid-2026, but this is a recent capability, not a mature one.
• Because DTCC does not support fractional ETF shares, a shareholder converting mutual fund shares into ETF shares can be left with a small unconverted residual that must be separately redeemed and is a friction point flagged in several funds’ own disclosures.
• ETF shares must be held in a brokerage account, and most 401(k) and other retirement recordkeeping platforms are not yet built to hold them so retirement-plan investors generally cannot convert into the ETF class today, and industry groups expect that gap to close only gradually.

4. Capital Gains Issues
Perhaps the most widely discussed challenge relates to capital gains distributions. A defining feature of many ETFs is their ability to use in-kind creation and redemption: rather than selling securities to meet investor activity, an ETF can often transfer securities directly, helping to limit realized gains within the fund.

Mutual funds operate differently. When mutual fund investors redeem, the fund typically needs to generate cash, which may require the portfolio manager to sell appreciated securities, creating realized capital gains that are distributed to shareholders. In a dual share class structure, both investor groups share the same portfolio, so gains generated by activity in the mutual fund class may affect ETF-class investors as well. There are mechanisms that can help offset some of this effect, but the interaction between mutual fund redemptions and ETF tax efficiency remains one of the most closely scrutinized aspects of the structure. How material this becomes will likely depend on investor behavior, redemption activity, and the nature of the underlying strategy.

5. Distribution Economics
The structure also raises a question for the intermediaries that ultimately decide whether to make ETF share classes available on their platforms. One industry estimate suggests wirehouses and broker-dealers could see between $15 billion and $30 billion a year in fee revenue at risk if assets migrate out of mutual fund share classes—a real incentive question layered on top of the technical ones.

6. Investor and Adviser Understanding
A single fund now sits behind two tickers that can behave differently day to day (one priced once daily at NAV, the other trading intraday and subject to its own premiums or discounts). Helping investors and advisers understand that these are share classes of the same fund, not competing products, and how conversions between them actually work, is its own ongoing education challenge.

Where Things Stand Today

As of mid-2026, regulatory approval has become close to routine (most of the roughly 100 firms that have filed have now received exemptive relief) and live launches are accelerating, from F/m’s first-to-market fund in February to Dimensional’s first active ETF share class in March to Fidelity’s planned entry. What has not caught up as quickly is the operational interoperability layer: automated conversions, full support for fractional shares, and retirement-plan access are all still being built out by DTCC, transfer agents, and recordkeepers.

For firms with large mutual fund franchises, the structure still offers a way to modernize the product lineup without abandoning existing assets under management. But the last year has made clear that the operational, distributional, and educational dimensions (more than the regulatory ones) will likely determine how far and how fast the model ultimately spreads.