Ready or not, global 401(k), dual share classes are coming.
F/m Investments introduced the first ETF mutual fund share classes last Friday, a bridge the company hopes to use to gain access to retirement plans. It represents one of the first prospectuses submitted to the Securities and Exchange Commission for approval of dual share classes for specific products. And this follows the regulator’s approval last week of an exemption requested by Dimensional Fund Advisors, which is the only company so far to get the green light. F/m had not received that broad approval from the SEC as of Tuesday, although the company anticipates it soon.
“It’s strange that we’re talking about this accounting topic as interesting, but it really is,” said F/m CEO Alex Morris. In approving the waivers, the SEC has asked asset managers to require dual share classes for all of their funds, leaving it up to fund boards to decide which individual strategies should get an ETF or mutual fund share class. “This is a really elegant way for fund boards and issuers to publish products,” Morris said.
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The big advantage for F/m is being able to port existing ETF strategies into mutual funds. Until now, companies have had to introduce separate products to achieve this, and one drawback is that performance history doesn’t necessarily count in the new vehicle. For 401(k) plan fiduciaries, that often means new funds can’t be added to their menus, since they tend to look at three or five years’ worth of track records when examining investment options. With the mutual fund share class, the ETF’s performance history is there in writing and the funds have the benefit of existing scale levels, Morris said.
Although the company has requested dual share classes from its existing product slate, it initially plans to add only two mutual fund share classes of existing ETFs, along with one ETF share class of an existing mutual fund. The firm, which has more than $18 billion in assets under management, expects to offer the strategies of its U.S. Treasury 3-Month Bill ETF (TBIL) and its Treasury Ultra-Short Inflation-Protected Securities ETF (RBIL) as mutual fund shares, Morris said.
The company is also expanding its product range, apart from the issuance of dual share classes:
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Over the summer it launched a series of passive fixed-income funds with the aim of avoiding taxes associated with dividends.
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It recently filed for a line of investment-grade corporate bond ETFs with maturities ranging from six months to 30 years. It is also preparing an “opportunistic income” ETF.