Cboe Global Markets has made a formal request to the U.S. Securities and Exchange Commission (SEC) for approval of a rule change that would permit issuers to merge exchange-traded funds (ETFs) and mutual funds. This proposal, outlined in a Form 19b-4 filing, aims to introduce ETF share classes into existing mutual funds, thereby enabling a multi-stock class fund structure. If greenlit, this regulatory adjustment would empower issuers to combine and offer comparable mutual funds and ETFs within a single investment vehicle.
ETF analyst Todd Sohn of Strategas LLC emphasized to Reuters that approval of Cboe's request could trigger a significant uptick in both the number of ETFs available and the total assets invested in ETFs. The potential for growth and innovation within the ETF market could be substantial in the wake of such regulatory changes.
Mutual funds and ETFs operate under distinct frameworks with differences in their trading and regulatory procedures. While mutual funds typically transact at the close of each trading day based on the fund's net asset value, ETFs trade on exchanges like stocks, with prices fluctuating throughout the trading session. If the proposed rule change is sanctioned, it could pave the way for the inclusion of Bitcoin ETF shares in mutual fund portfolios, thus opening avenues for investment in digital assets.
This proposed system is not entirely novel. Vanguard Group has been employing a proprietary investment strategy since 2001, allowing for a unique "share class" structure within its ETFs. Under this arrangement, Vanguard ETFs can function as a share class of its existing mutual funds, sharing the same underlying portfolio. However, Vanguard's patent on this share class concept is set to expire in May 2023.
Several prominent asset managers, including Dimensional Fund Advisors, Morgan Stanley, and Fidelity, have already sought regulatory clearance to replicate Vanguard's model, according to Reuters. Notably, T. Rowe Price and JPMorgan Chase & Co. have also expressed interest in adopting a similar approach. The fate of Cboe's application lies in the hands of the SEC, which must render a decision within 240 days. ETF analyst Eric Balchunas of Bloomberg underscored that such filings compel the SEC to respond, providing clarity to issuers and market participants alike.
Forecasts from Mordor Intelligence project robust growth for the North American ETF market, with expectations that it will surpass $8 trillion by 2024 and expand further at a compound annual growth rate of 14% to reach $15.52 trillion by 2029. These projections underscore the significant potential impact of regulatory changes on the ETF landscape.
