BlackRock gets in line for the elusive ETF share class

Since Vanguard’s patent on the ETF share class of its mutual funds expired last year, dozens of companies have queued up with the SEC for permission to add their own ETF share classes to existing funds – but one name was notably missing from that list, until this week: BlackRock.

Why the largest asset manager waited until now to ask for the Securities and Exchange Commission’s blessing is unclear. But when BlackRock raises its hand, that causes speculation that the company knows something others don’t, or at least that it may think the SEC is likely to soon start approving exemptions for ETF share classes of mutual funds.

“The timing is interesting,” said Daniel Sotiroff, senior manager research analyst at Morningstar. “There is this notion out there that when BlackRock enters the picture, the conversation gets more serious.”

That seemed to be the case last year, when BlackRock filed with the SEC for a spot bitcoin ETF, a category that the regulator began approving in January 2024.

Further, “with elections, there is the potential for turnover in leadership in federal agencies” that could end up slowing down requests for exemptions, although, “just because BlackRock got in line doesn’t mean these things are going to get approved in a matter of weeks,” Sotiroff said.

The ETF share class concept is enticing for asset managers, as it lets them efficiently add an ETF option for existing mutual fund strategies that have track records and, often, considerable asset bases. However, the SEC has not granted any ETF share class exemptions beyond Vanguard’s – and in no cases has it approved an ETF share class for an actively managed strategy.

The latter may be quite important for fund companies. Investor demand has heavily favored ETFs in recent years, as assets have poured out of actively managed mutual funds.

This year through September, more than $303 billion has left active mutual funds on a net basis, while passive ETFs raked in more than $490 billion, active ETFs garnered more than $193 billion, and passive mutual funds brought in more than $44 billion, data from Morningstar Direct show.

A curious development happened Friday, when State Street filed a request with the SEC to do the opposite of what others have sought – adding mutual fund share classes of existing ETFs. That change would allow the company’s current ETF strategies to compete for space within the $4 trillion within the defined-contribution plan market invested in passively managed products, it said in the filing.

“Each mutual fund class would be specifically designed for, and only available to, investors purchasing through a retirement plan, such as pension plans, retirement plans (e.g., 457, 401(a), 403(b) and/or 401(k) plans,” the filing read.

Although more than 30 fund companies have sought the SEC’s blessing for ETF share classes, it’s notable that BlackRock is the largest asset manager, said Todd Rosenbluth, head of research at TMX VettaFi.

“And they’re the largest ETF provider, so they have some of the expertise that some of these other companies that are seeking relief to offer an ETF share class don’t have,” Rosenbluth said.

What could also be a factor in the timing is a request made in April by Cboe to allow ETF share classes of mutual funds, given that the SEC had 180 days from that to respond, he noted.

“There is momentum among the asset managers to get prepared in case the SEC acts favorably to the Cboe request.”

Even so, the SEC might not make a decision before the end of President Joe Biden’s term, he said. But asset managers will still want to be as close to the front of the line for approval, whenever that starts to happen, he said.

Another name missing from the roster of companies in line for approval is Vanguard, Sotiroff noted. Although that is the only company with an ETF share class, the SEC a decade ago denied the firm’s request for an exemption for active strategies – and it has not filed for one recently.

In a statement by the company, BlackRock alluded to the ever-growing popularity of ETFs as a factor in its request for an exemption.

“BlackRock is committed to aligning the strategies we offer with the investment vehicles that best suit our clients’ evolving needs,” said Rachel Aguirre, head of US iShares product at BlackRock, in an emailed statement from the firm. “The multi-class structure opens an important new avenue of choice for clients to invest in the manner that helps them achieve their distinct financial goals.”

One question the SEC is likely considering as it decides how to rule on the applications for exemptions is whether mutual fund shareholders would be at a disadvantage compared with those using an ETF share class, given the cash drag on mutual funds that doesn’t affect ETFs, Sotiroff said. But, ETFs can simply be a big plus for investors, he noted. And for asset managers, ETFs are easier to distribute, he said.

“It’s rare that you see something come along that benefits the end investor and the asset manager,” he said.

“BlackRock is kind of like an ‘everything to everyone.’ If there is something new and novel out there and it makes sense for them to have it in their product line, they’re probably going to go after it.”