SEC Paves Way for ETF Expansion With Mutual Fund, Crypto Moves

Popular exchange-traded funds are at a crossroads after the SEC approved investment products tracking multiple cryptocurrency tokens and laid the groundwork for traditional mutual funds to incorporate ETFs.

The regulator disclosed a plan Sept. 29 to grant Dimensional Fund Advisors the ability to offer ETFs as a class of mutual fund shares—a tax-saving setup previously available only to Vanguard Group through a patent. That move opens the door for dozens of US money managers including industry giants BlackRock Inc. and State Street Corp. seeking to introduce the same structure to their funds.

In a separate decision last month, the Securities and Exchange Commission opened the floodgates to new digital asset exchange-traded products, giving Grayscale Investments the go-ahead to offer the first such product tracking a basket of cryptocurrency assets beyond just Bitcoin or Ether.

In both cases, the SEC under Chairman Paul Atkins has set its sights on ending uncertainty around ETFs, after years of delayed applications and legal gray areas that plagued asset managers hoping to innovate using the popular investment wrapper.

Atkins’ SEC has made a point of departing from areas perceived as stumbling blocks for Biden-era Chair Gary Gensler, performing an about-face on all things related to cryptocurrency, and now embracing the dual-share fund model.

“When Atkins came in, that filing from Dimensional had just been sitting there,” said Michael Mundt, a partner at Stradley Ronon Stevens & Young LLP who specializes in ETFs. “This kind of structure is viewed as allowing for greater asset growth because you have two different distribution channels going into the same fund.”

Allowing mutual funds to offer ETF share classes increases retail investment options, lowers investor costs, and advances innovation, said Brian Daly, director of the SEC’s division of investment management.

“This relief represents the beginning of a ‘Third Wave’ of ETF innovation,” he said in an email. “With this new relief, the ETF can co-exist with traditional mutual fund shares in a single fund structure, allowing the industry to make the ETF structure available to even more investors.”

Investor Access

ETFs have become the vehicle of choice for millions of investors, as the industry swells to around $12 trillion in US assets under management. It’s now poised to skyrocket even higher after the SEC’s latest moves.

“The big benefits for investors are that it’s easier to get economies of scale, because a combined class fund could sell shares both through the channels that traditional mutual funds use and retirement plans in particular,” said Brian McCabe, a partner at Ropes & Gray LLP specializing in registered funds.

President Donald Trump issued an executive order in August calling for more widespread access to alternative assets in retirement plans, including actively managed vehicles investing in digital assets via 401(k) accounts.

“More sunlight would be a good disinfectant, but that sunlight should be specifically tailored for crypto asset products,” said Yuliya Guseva, a professor and director of the fintech and blockchain research program at Rutgers Law School. “ETFs are just the next step for digital assets. Putting them within the umbrella of regulated investment companies, we’re giving investors more choices.”

Tailoring a compliance regime to fit digital assets will require cooperation between the SEC and the Commodity Futures Trading Commission, a point agency leaders emphasized at a joint roundtable this week.

“Having a regulatory SEC-CFTC accord would be a positive development, but we’ve been there before. We know that those agreements can be broken,” Guseva said. “We do need a market structure bill to have a solid framework for regulating those products and clarifying which agency—the SEC or the CFTC—should take the lead.”

The House-passed “CLARITY Act” (H.R. 3633), now awaiting Senate action, aims to impose that market structure for crypto assets. If signed into law, the legislation would give the relatively small CFTC responsibility over a much wider swath of crypto asset transactions than ever before.

ETFs Everywhere

The SEC took another step to embrace more widespread crypto ETP uptake in a separate rule change last month allowing exchanges to adopt generic listing standards for products that hold digital assets, precious metals, and certain other commodities without needing to first undergo agency review.

“These do not sound like investment products for which the Commission’s principal concern should be to reduce the timeframe for bringing them to market—rather, they sound like products that necessitate full and careful Commission review,” Democratic Commissioner Caroline Crenshaw said in a statement on the permissive ETP listing shift. “Our mission, after all, is to protect investors—not to fast-track untested investment products for listing and trading on exchange.”

Removing regulatory roadblocks means new spot crypto ETFs will likely receive swifter approval. Grayscale’s breakthrough last month potentially heralds an influx of greenlit products that track the spot price of tokens like XRP, Solana, and Cardano.

“They had this long, winding path to launch,” said Steve Feinour, a partner at Stradley Ronon who advised clients on some of the industry’s first spot Bitcoin and Ether ETFs. “It really snowballs from there and moves out into the periphery with the spot digital asset ETP at the center of that.”

The SEC’s choice to grant exemptive relief to Dimensional similarly sets up a dual share class fund boom, as major money managers seek SEC approval to launch their own ETF share classes since Vanguard’s patent on the model expired in 2023.

“The two developments are trying to solve separate things—one about making an asset class available, and the other trying to prevent you from having two separate vehicles to do something that you really should be able to do in one,” McCabe said. “There will probably be some combined class funds that are investing in crypto products that you couldn’t invest in six months ago.”