ETF Share Classes: New Frontier or Tax Trap for Managers?
- ETF share classes are gaining momentum globally across U.S. and European markets.
- Traditional managers are embracing ETF offerings amid mutual fund outflows.
- Tax benefits and transparency concerns create hurdles for implementation.
In 2025, exchange-traded fund share classes of mutual funds have emerged as a key focus for asset managers across the U.S., Ireland, Luxembourg and several Asia-Pacific markets, according to a new report from JPMorgan Chase & Co. (JPM).
With global ETF assets reaching $14.9 trillion and U.S. ETPs surpassing $10 trillion, traditional fund managers are scrambling to capitalize on the ETF boom while stemming outflows from their mutual fund businesses, according to JPMorgan's “The rise of ETF share classes of mutual funds” report.
Investors are voting with their dollars, fueling net new ETF inflows while pulling money from mutual funds. This market shift has forced established players to consider adding ETF share classes to existing mutual funds rather than undergoing complex, full-scale conversions—but the approach comes with limitations and may not deliver the tax benefits that have made ETFs attractive in the first place, according to the report.
The move toward ETF share classes accelerated after the 2023 expiration of a Vanguard patent that previously protected its unique structure. For many managers, this represents a middle ground between maintaining the status quo and undertaking the more complex process of converting mutual funds to ETFs—a path already taken by 130 funds since 2021, including 57 in 2024 alone, JPMorgan reports.
However, the key question remains whether investors will embrace these hybrid vehicles or continue to favor pure ETF structures with their full suite of advantages.
Tax and Transparency Challenges Loom Large
The tax efficiency question looms particularly large for U.S. managers. In the U.S., the Securities and Exchange Commission is currently reviewing an ETF mechanism that could reduce capital gains tax by transacting securities in-kind, according to the report.
European fund managers face their own hurdles, with JPMorgan highlighting that "combining with a mutual fund could risk losing tax treaties" that pure ETF structures currently enjoy.
Beyond tax considerations, portfolio transparency presents another barrier. "Daily transparency is beneficial for ETFs, but some mutual fund managers may resist this level of disclosure," the report states.
Operational complexity also increases when combining both structures. The analysis points out that "swing pricing in mutual funds does not apply to ETFs, requiring a complex model for both share classes."
Despite these challenges, the approach isn't without merit for certain managers. JPMorgan suggests, "If an asset manager has an existing ETF infrastructure, adding an ETF share class to mutual funds is viable; otherwise, success may be limited."
