SEC Approves Dimensional’s ETF Share Class Application: What Comes Next?

The active ETF renaissance will see new tailwinds

Active ETFs were already gaining traction before the SEC’s decision, and several forces have contributed to that momentum. Fee compression has been a major driver. Active equity ETFs now come to market with expense ratios around 0.25%, and active fixed income ETFs often land near 0.15%.

Much of the long-documented underperformance of active funds relative to passive indexing has been created by fee drag, not necessarily weak security selection. As that drag shrinks, the comparison looks different. With fees converging and the gap narrowing, investors and advisors may reassess the trade-off.

This approval cements my view that we’re about to see a surge in well-known active strategies coming to market as ETF share classes. Dimensional is the obvious early mover with its factor-based lineup, but I expect others such as Fidelity and T. Rowe Price to follow.

The ability to use the ETF creation and redemption process is another major advantage. It largely eliminates the capital gains distributions that often burden active mutual funds. Those distributions stem from higher turnover and the need to sell holdings to meet redemptions. In an ETF wrapper, most of that friction disappears because redemptions are handled in kind.

With that issue removed, the structure becomes a logical strategic choice for ETF executives. It may also give the mutual fund side of the business a brief reprieve. The category has faced persistent outflows for years, and offering ETF share classes could slow that trend by allowing firms to modernize existing strategies rather than rebuild them from scratch.

Semi-transparent ETFs will see more headwinds

My view of semi-transparent ETFs has always been that they served as a temporary workaround. They existed because no firm other than Vanguard could offer ETF share classes of its mutual funds. Once the patent expired and the SEC opened the door, the purpose of many semi-transparent structures became harder to justify.

T. Rowe Price and Fidelity are the clearest examples. Both launched semi-transparent ETFs built around long-established flagship strategies. T. Rowe Price used the structure for its Blue Chip Growth and Dividend Growth strategies. Fidelity did the same for its version of Blue-Chip Growth and also Magellan.

Because these ETFs were launched under semi-transparent models, they relied on tracking baskets instead of full daily disclosure and provided holdings updates only periodically. The intent was to protect active managers’ intellectual property.

They saw some traction, but the question lingered: how much more successful would these products have been if they had launched as ETF share classes of the existing mutual funds?

Whether the current semi-transparent versions of these well-known strategies will ever be converted or reissued as ETF share classes is doubtful. Their scale, track records, and portfolio structures make a clean transition unlikely. For future launches, though, I expect firms like Fidelity to prioritize ETF share classes. For example, an ETF share class version of Contrafund feels like an obvious candidate.

For semi-transparent ETFs as a category, the outlook has dimmed. Advisors and retail investors have been slow to embrace them. Many dislike the limited visibility. They argue that if an ETF is priced and traded like any other ETF, it should disclose like one.

The claim that semi-transparent structures are needed to protect alpha-generating research hasn’t resonated. Most investors recognize that true alpha tends to come from process, not secrecy, and broad ETF industry trends have moved toward more transparency, not less.

With ETF share classes now viable for the entire industry, semi-transparent wrappers face a tougher path. The structure is not obsolete, but it will be harder for firms to justify new launches when they can now extend the brands and scale of existing mutual funds into fully transparent ETF share classes.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.