The U.S. Securities and Exchange Commission (SEC) has made two significant regulatory decisions that are set to reshape the landscape for exchange-traded funds (ETFs). The agency has streamlined the approval process for new cryptocurrency ETFs and, in a separate ruling, has allowed an asset manager to offer an ETF share class for its existing mutual funds, a move that could be adopted by dozens of other firms.
These changes are expected to increase the number of crypto-related investment products available to the public and provide a new structure for mutual funds to compete with ETFs. For investors, this means more choices but also a greater need to understand the underlying assets and potential risks associated with these new fund structures.
Key Takeaways
- The SEC has agreed to fast-track the launch of new cryptocurrency ETFs, moving from a lengthy review process to a more standard approval timeline.
- Dimensional Fund Advisors received approval to add an ETF share class to its mutual funds, with over 70 other firms seeking similar permissions.
- These regulatory shifts are expected to increase competition, potentially leading to lower fees for investors in both crypto ETFs and traditional funds.
- Experts advise investors to remain cautious, focusing on the underlying investment strategy rather than the fund structure itself, especially given the speculative nature of crypto assets.
A Faster Path for Cryptocurrency ETFs
The SEC has adjusted its approach to approving cryptocurrency-based exchange-traded funds. Previously, each new crypto ETF proposal underwent a long, case-by-case review. The new framework transitions this process to a standard listing approval, significantly shortening the timeline for new products to reach the market.
This change is expected to trigger a wave of new crypto ETFs from various asset managers. According to Bryan Armour, director of ETF and passive strategies research for North America at Morningstar Research Services, this influx of products will likely intensify competition among fund providers.
Increased Competition May Lower Fees
The introduction of spot bitcoin ETFs in early 2024 demonstrated how competition can impact costs. As multiple firms launched similar products, a "fee war" began, driving down management expenses for investors. A similar trend is anticipated as more ETFs tracking other cryptocurrencies, such as Ether, become available.
Understanding the Inherent Risks
While new investment vehicles provide more access, the nature of the underlying assets remains unchanged. Morningstar continues to classify cryptocurrencies as speculative and high-risk assets. Their prices are known for extreme volatility, and they lack the history of fundamental value drivers, like earnings or cash flow, that support traditional assets like stocks and bonds.
"Examine the underlying strategy before adding exchange-traded funds to your portfolio," advises Bryan Armour. "They’re just the vehicle. Does the underlying cryptocurrency...make sense? Let that guide the investing strategy."
Investors considering these new ETFs should be aware of this volatility. The performance of existing crypto ETFs in 2025 has been mixed, reflecting the unpredictable movements of the digital asset market. For example, the iShares Bitcoin Trust (IBIT) and the iShares Ethereum Trust (ETHA) have experienced significant price swings throughout the year.
Mutual Funds Gain ETF Flexibility
In a separate but equally important development, the SEC has granted Dimensional Fund Advisors (DFA) permission to add an ETF share class to its existing mutual funds. This structure, pioneered by Vanguard, allows a single fund to offer both traditional mutual fund shares and ETF shares.
What Is an ETF Share Class?
An ETF share class allows a mutual fund to offer a version of its portfolio that trades on a stock exchange throughout the day, just like a stock. This can offer benefits such as greater tax efficiency and potentially lower costs compared to traditional mutual fund shares, which are priced only once per day after the market closes.
This approval is a landmark decision. For years, Vanguard was the only firm with a patent to use this dual-share class structure. With that patent expired, more than 70 other asset managers have collectively petitioned the SEC for the same ability. DFA's approval is seen as the first step in opening the floodgates for others.
Potential Benefits for Individual Investors
The expansion of the dual-share class model could bring several advantages for retail investors. The primary benefits include:
- Tax Efficiency: The creation and redemption process for ETFs can help minimize capital gains distributions, which are a common tax burden for mutual fund investors.
- Lower Costs: ETFs often have lower operating expenses than their mutual fund counterparts.
- Intraday Trading: Investors can buy and sell ETF shares at any time during market hours, offering more flexibility than mutual funds.
However, the rollout will not be immediate. According to Morningstar analysts, firms like DFA must first overcome operational hurdles. They need approval from their funds' boards and must ensure that investment platforms and service providers can support the technical requirements of dual-share class funds.
Market Outlook and Investor Caution
These regulatory developments arrive at a time of heightened market sensitivity. Dan Kemp, chief research and investment officer at Morningstar Investment Management Europe, recently noted that markets are showing signs of a potential "melt-up."
A melt-up occurs when investor sentiment becomes overwhelmingly positive, causing asset prices to rise sharply and rapidly, often disconnected from underlying fundamentals. Kemp warns that such periods can be dangerous.
"A melt-up happens when investors believe ‘all news is good news’ during a market cycle, and the markets keep going up," Kemp stated. He explained that this can tempt investors to chase returns at increasingly high prices, leading to over-commitment at peak valuations and setting the stage for significant losses when a correction occurs.
Final Takeaway for Investors
The arrival of new crypto ETFs and innovative fund structures presents both opportunities and challenges. The key for investors is to look beyond the hype and carefully evaluate how these products fit within their overall financial plan and risk tolerance.
The core advice from analysts is to prioritize the investment itself over the packaging. Whether it is a new crypto ETF or a mutual fund with an ETF share class, the fundamental question remains the same: is the underlying strategy a sound and suitable addition to your portfolio?
