The Securities and Exchange Commission (SEC) has made one of its most transformative decisions in years by approving a rule that allows fund companies to create exchange-traded fund (ETF) share classes of traditional mutual funds. This move is poised to reshape how investment products are designed, sold, and marketed across the $27 trillion U.S. fund industry.

For decades, mutual funds and ETFs have operated in separate lanes. Mutual funds are priced once daily, while ETFs trade in real-time on the stock market. The new SEC rule blurs that distinction, allowing firms to combine the two structures within a single fund.

What the SEC’s Decision Means for Fund Companies

This rule unlocks new flexibility for fund providers and offers several advantages that could reshape the investor experience:

• Lower Costs and Greater Efficiency: Managers can use the same pool of assets to offer both ETFs and mutual funds, cutting redundancy and reducing management fees.

• More Competition: Over 70 firms have already signaled interest in creating ETF share classes, suggesting a wave of new hybrid products could soon enter the market.

• Operational Simplicity: Firms can streamline portfolio management while still meeting the SEC’s requirements for transparency and liquidity.

This development creates a more level playing field, encouraging innovation in product design and more choices for investors.

State Street’s Strategic Twist

While most fund companies are looking to convert existing mutual funds into ETFs, State Street Investment Management is taking the opposite approach. Known for its $1.7 trillion SPDR ETF lineup, State Street plans to create mutual fund versions of its ETFs.

The goal is to gain access to the massive retirement savings market, particularly 401(k) and 403(b) plans, which traditionally favor mutual funds. According to Anna Paglia, State Street’s Chief Business Officer, this strategy will allow retirement investors to benefit from ETF-like efficiency.

“The ETF technology is the most efficient in this market,” Paglia said, “but it’s not the right wrapper for everyone.”

By offering mutual fund versions of its ETFs, State Street aims to bridge the gap between innovation and accessibility in retirement investing.

The Broader Regulatory Impact

The SEC’s move marks a shift toward a more adaptive regulatory landscape where innovation and compliance can coexist. It encourages fund companies to rethink traditional structures and embrace flexibility.

Currently, innovation has temporarily slowed due to the ongoing government shutdown, which has delayed further SEC approvals. However, once operations resume, the industry expects a surge in new filings and hybrid product launches.

This new rule does more than change fund structure, it redefines market strategy. It opens the door for firms to compete on efficiency, transparency, and investor value, creating a more dynamic and competitive investment environment.

The Future of Fund Innovation

The SEC’s approval of ETF share classes represents a fundamental change in how Americans will invest in the future. By breaking down the barriers between ETFs and mutual funds, this rule empowers fund managers to innovate and investors to access more cost-efficient products.

With major players like State Street already moving to capitalize on the opportunity, the traditional lines between ETFs and mutual funds may soon disappear entirely.