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The investment industry is entering the final phase of the death of traditional mutual funds with the redeem-at-distributor-only model. What makes us assert this? At the end of November, the SEC formally approved the first applications for mutual fund complexes to offer an ETF share class within a single fund structure, following the expiration of Vanguard's patent. Over 60 other fund sponsors have since re-filed "substantially identical" applications and are expected to receive approval promptly. 

In November 2025, the SEC granted formal approval to Dimensional Fund Advisors LP (DFA) to offer both ETF and mutual fund share classes within the same fund structure. This makes Dimensional the second firm, after Vanguard, to use this model, and the first to implement it for actively managed products.  Following a signal of the imminent approval in September 2025, over 60 other asset managers, including firms like BlackRock, Morgan Stanley, and Fidelity, have re-filed applications for similar exemptive relief.  The SEC staff has indicated that these "substantially identical" applications will be reviewed on an expedited basis. This move is expected to lead to a wave of new ETF share classes in the market.  To facilitate these conversions, the Depository Trust and Clearing Corporation (DTCC) is enhancing its systems to support automated mutual-fund-to-ETF share class conversions, with industry testing expected first half of next year.  

The Investment Company Institute (ICI) highlights significant potential benefits including economies of scale, tax efficiency for shareholders and greater flexibility for shareholders providing more options at lower costs. The SEC's move is seen as a significant shift towards modernizing the regulatory framework, fostering competition and innovation in the asset management industry.  This comes as no surprise to us.

As early as December 2000, yours truly authored an article for the Dow Jones Journal of Indexes “ETFs Can Benefit Active Managers” showing how the structure greatly benefited the managers, the fund company, and its investors not only through tax advantages to the shareholders but through operational efficiencies as well. The ETF structure insulates the fund from needing to carry cash and from daily cash contributions and redemptions.  This contributes positively to fund returns.  It also means the positions may be liquidated solely on the basis of investment consideration, not capital gains considerations as had been the norm.  We updated the original article concepts in 2019 and published it on this website as “Leveling the Playing Field for Active Managers.” You can read it by clicking here.

Once investors are allowed to migrate their assets into an ETF share class, the question as why wouldn’t all of them? Although two major ETF pundits think that the next direction in new filings is down even with the new expedited path because the traditional structure is too entrenched and the smaller mutual fund complexes have no good way of selling their offerings as ETFs.  Where have we heard that before?  Why is the status quo in the traditional structure continuing to hemorrhage assets? While it is certainly true that many, perhaps most, of these funds will struggle to find customers as ETFs, that will because they are not as good as competitors’ offerings and in an open-exchange-listed environment, they will eventually have to close.  However, if they are losing money in the more expensive and less efficient current structure, they will have to close anyway. The genie is out of the bottle because investors are being educated by peers with access to far more information than ever before.  Once any queries are made, there’s no reason to put new money in traditional mutual funds.  Another benefit to investors is that once in the ETF share class, they would not be subjected to the 0.75% redemption fee that has become standard in the traditional mutual fund industry.

The challenge to fund complexes now becomes competing in an open competition environment with other active and indexed ETFs.  Competition of this type with all information easily available to the public and its AI tools like never before greatly benefits end investors.  It also makes it nearly impossible for fund complexes to compete for taxable investors with any fund structure that is not an ETF.  The only thing that might keep the traditional structure alive for five to ten more years are 401(k), 503b and similar plans.  Collectively, they now comprise about 63% of all traditionally structured mutual fund assets.  Most of these plans that remain entrenched for now would have to make extensive changes to use ETFs in lieu of mutual funds. Since employees are captive to what their employers offer and the latter group has no great incentive to make changes, that is unlikely to change soon. However, since most plans offer between 10 and 30 investment options altogether and the largest players tend to dominate those options, smaller complexes will have difficulty surviving without converting everything competitive to ETFs via the share-class route while folding funds that are losing money on an operating basis.

Currently, according to Statista, there are about 8,000 actively managed mutual funds in the US. According to ETF Global Insight, a leading ETF research firm, there are now more than 2,000 actively managed US ETFs, up from less than 100 in 2019. Given current realities, we are likely to see most of these funds offering ETF share classes (or converting solely to ETFs) within the next three to five years. 

Using ETFdb, a TMX VettaFi product, we examine the current state of the active ETF industry.  This table consolidates some fast facts as of 09/30/2025:

Taking a look at the 136 active US equity ETFs with more than five years of performance, we profile the top seven posting the highest 5-year annualized returns.

• DFNL (Davis Select Financial ETF): An actively managed, non-diversified ETF from Davis Advisors that seeks long-term capital growth by primarily investing at least 80% of its net assets in equity securities of companies in the financial services sector. It uses a value-based, fundamental analysis approach to select durable, well-managed financial companies.
• IETC (iShares U.S. Tech Independence Focused ETF): An actively managed fund from BlackRock seeking long-term growth by investing in U.S. tech companies with resilient, domestic supply chains and production capabilities, focusing on semiconductors, software, and hardware firms. It employs machine learning to identify relevant companies across various sectors.
• UTES (Virtus Reaves Utilities ETF): An actively managed ETF from Virtus Capital seeking total return (capital appreciation and income) by investing at least 80% of its net assets in equity securities of companies in the utilities sector, such as electric, gas, and water utilities. It uses a bottom-up stock selection process and is known for a high concentration in its top holdings. 
• DYNF (iShares U.S. Equity Factor Rotation Active ETF): An actively managed fund from BlackRock that seeks to outperform the U.S. equity market by dynamically rotating across historically rewarded style factors like value, momentum, quality, size, growth, and minimum volatility using a proprietary model. It primarily invests in large- and mid-cap U.S. common stocks.
• IQM (Franklin Intelligent Machines ETF): An actively managed fund from Franklin Templeton seeking capital appreciation by investing in companies involved in intelligent machines, artificial intelligence (AI), and robotics, both domestically and internationally. It uses fundamental analysis to identify disruptive business models.
• USMC (Principal U.S. Mega-Cap ETF): An actively managed fund that seeks long-term growth of capital by investing in equity securities of U.S. mega-cap companies selected using a proprietary quantitative model that emphasizes factors like value, momentum, quality, and low volatility. The fund primarily targets companies in the top 50th percentile of the S&P 500.
• WTV (WisdomTree US Value Fund): An actively managed ETF seeking income and capital appreciation by investing in U.S. large- and mid-cap companies with high "total shareholder yield" (dividends plus buybacks) that also pass specific quality screens like strong Return on Equity (ROE) and Return on Assets (ROA).
• SPYM (SPDR Portfolio S&P 500 ETF): The benchmark for this study is a passively managed ETF that seeks to replicate the S&P 500 Index.

It should be noted that only 19 of the 136 active funds outperformed SPYM for the five-year annualized period.  Based upon these results, Davis Advisors can claim sometimes investors do get what they pay for, justifying the fact that DFNL has the highest expense ratio.  The ETF more than earned its fee by delivering the top five-year return along with the highest dividend yield and the highest return over the past 30 days.  Moreover, its year-to-date return was the second highest, and its Beta was the third lowest.  Four of its top eight holdings including Capital One Financial (COF). Markel Group (MKL); Wells Fargo Corp. (WFC); and JP Morgan Chase (JPM) are rated 4 (Buy) by ValuEngine. 

The top-rated ETF in this group that is rated by ValuEngine is UTES with a 5 (Strong Buy),  Its two top holdings are rated favorably. Constellation Energy is rated 4 (Buy) and Talen Energy Corp. (TLN) is rated 5 (Strong Buy).  However, no industry-centric ETF can be impervious to industry moves. With utility stocks suddenly under siege the past four weeks following a very strong year, UTES decline 4.4% in the past four weeks, still better than the 5,1% loss posted by XLU, the State Street Select Sector SPDR that has become the industry’s de facto benchmark.

The next highest-rated ETF in this group is DYNF, iShares U.S. Equity Factor Rotation Active ETF. It is rated 4 (Buy).  It has one 5-rated stock, Broadcom (AVGO) in its top ten holdings list. It is also by far the largest of these seven active ETFs with $30 billion in assets under management.

Getting back to current events, another major event surrounding ETFs happened this week, this surrounded QQQ, the Invesco QQQ ETF Trust (name likely to be changed), one of most popular ETFs and the most traded ETF in the US. 

The following is an excerpt from the Invesco press release:

“Invesco Ltd. (NYSE: IVZ), a leading global asset management firm announced today that shareholders in Invesco QQQ Trust voted to approve proposals to modernize Invesco QQQ, restructuring it from a unit investment trust ETF to an open-end fund ETF, and changing its governance structure to a board of trustees. Invesco expects QQQ to begin trading as an open-end fund on Monday, December 22. As part of this conversion, shareholders of Invesco QQQ will benefit from a decrease in the fund’s total expense ratio from 0.20% to 0.18%. The reclassification also provides the opportunity for Invesco QQQ to reinvest income and participate in securities lending. There will be no tax implications from this conversion for QQQ investors. “I want to thank the shareholders who voted to transform Invesco QQQ into a modern ETF format. We are proud to deliver a ten percent reduction in fees to QQQ investors while creating more flexibility to utilize tools that could deliver better outcomes for investors,” said Andrew Schlossberg, President and CEO of Invesco.”

Congratulations to Invesco US. This is a terrific initiative that benefits shareholders and will improve performance and operational efficiency as well. Perhaps this will serve as an example to the accomplished and highly respected ETF leadership at State Street Investment Management regarding the industry’s three other major ETFs currently encumbered with the unit investment trust structure: SPY, SPDR S&P 500 ETF Trust; MDY, SPDR S&P MidCap 400 ETF Trust; and DIA, SPDR S&P MidCap 400 ETF Trust. As one of the ETF industry’s original innovators and to this day, one of its top movers and shakers, we wouldn’t be surprised to see some important announcements soon.

This is our last major blog for 2025.  We wish everyone a happy, healthy, and prosperous New Year.

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