ETF share classes: the patent that expired

A mutual fund with an ETF share class is one portfolio with two doors. Investors who come in through the ETF door redeem in kind, and every in-kind redemption lets the manager hand out the lowest-basis lots. Those lots belonged to the whole portfolio, so the mutual-fund shareholders who never touched the ETF door benefit too. One firm patented this in 2001 and used it alone for two decades.

1. May 2023 The patent expires. Fund companies begin filing for permission to copy the structure.
2. Late 2025 About 80 applicants are waiting at the SEC.
3. Nov 17, 2025 The SEC grants the first order, to Dimensional, with nine conditions overseen by the fund board.
4. Feb 2026 The first new share class goes live, on a Treasury-bill fund.
5. Mar 2026 Blanket exchange-listing relief so each fund does not need its own order.
6. Apr 2026 T. Rowe Price receives its order.
7. Mid 2026 Fidelity launches its first classes. Two dozen or more firms have orders by the summer.

What changes for a mutual-fund holder

Nothing on the statement. The fund keeps its name, its manager, and its shares. What changes is the tax line at year-end: a fund whose ETF class purges low-basis lots in kind has far less gain left to distribute. The structural reason mutual funds paid out gains in 72% of cases in 2025 while ETFs mostly did not starts to disappear for the funds that add a class.

There is a fairness question inside the structure, which is what the SEC’s conditions address: the ETF class must not subsidize the mutual-fund class or the reverse, and the board has to watch for it. The conditions are principles, not a formula.

What it means for tax-managed mutual funds

Tax-managed mutual funds earned their fee by keeping turnover low and harvesting internally, and they still distributed in bad years. A plain fund with an ETF class does the same job better through the redemption mechanism. The category’s reason to exist narrows to funds that cannot or will not add a class.

Whether to wait for it

A holder of a mutual fund with a large embedded gain has a real choice: sell and pay the tax to move into an ETF, or hold and wait for the fund to add a class. The rollout is one firm at a time and the first movers were the ones that filed early. For a fund company that has not applied, waiting has no date attached.