Cboe seeks SEC approval to mix mutual funds with ETFs

Cboe Global Markets has asked the United States Securities and Exchange Commission to approve a rule change that would allow issuers to combine exchange-traded funds (ETFs) and mutual funds. 

According to a Reuters report on April 4, Cboe submitted a 19b-4 form requesting the green light to add an ETF share class to existing mutual funds, allowing for a multi-share class fund structure. If approved, the rule would allow issuers to combine and offer similar mutual funds and ETFs within a single investment vehicle.

Todd Sohn, an ETF analyst at Strategas LLC, told Reuters that “both the number of ETFs and ETF assets could soar” if the SEC approves Cboe’s request.

Mutual funds and ETFs present unique differences in their operations, as well as regulatory frameworks. Mutual funds are typically bought and sold at the end of the trading day at a price based on the fund’s net asset value, which is calculated after the market closes.

ETFs, on the other hand, trade on exchanges throughout the trading day at market prices, like stocks, and can fluctuate at any time. If the rule change is approved, Bitcoin (BTC) ETF shares could potentially be added to a mutual fund’s portfolio, offering exposure to the digital asset.

The proposed system won’t be the first of its kind. Since 2001, the Vanguard Group has had a patented investment strategy that allowed for a unique “share class” structure within their ETFs. 

This structure enabled Vanguard to offer ETFs as a share class of their existing mutual funds, allowing both funds to share the same underlying portfolio. Vanguard’s patent on this share class concept expired in May 2023.

According to Reuters, eight asset managers — including Dimensional Fund Advisors, Morgan Stanley and Fidelity — have since filed for regulatory approval to replicate the model. T. Rowe Price and JPMorgan have also expressed interest in using a similar approach.

Cboe’s application must be approved or rejected by the SEC within 240 days. Bloomberg ETF analyst Eric Balchunas noted that the filing gives issuers a chance to force the SEC to respond to their applications.

According to Mordor Intelligence, the North American ETF market is projected to eclipse $8 trillion in 2024 and expand at a compound annual growth rate of 14% to $15.52 trillion by 2029.

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