For more than two decades, Vanguard held a unique position in the US fund industry. Its patented dual share class structure allowed investors to access the same underlying portfolio through either a mutual fund or an ETF share class.
When that patent expired in 2023, many expected the industry to move quickly. Instead, asset managers found themselves waiting for regulatory clarity.
That clarity emerged in late 2025, when the SEC approved the first non-Vanguard dual share class structures. Since then, a growing number of asset managers have sought approval to introduce ETF share classes alongside existing mutual funds and this has now become one of the most closely watched developments in the US investment fund market.
While the concept itself is not new, the industry is only now entering the implementation phase. Asset managers, administrators, custodians and regulators are gaining practical experience with these structures for the first time. As a result, attention is increasingly shifting from whether dual share classes can be launched to how they will operate in practice.
Why Asset Managers Are Embracing Dual Share Classes
The Challenge Behind the Opportunity
Why Capital Gains Have Become a Focus Area
A New Operational Ecosystem Is Emerging
Potential Withholding Tax Considerations
The rise of ETFs has forced many traditional asset managers to rethink how they bring products to market.
Historically, managers wanting to participate in the ETF market often had to launch an entirely separate fund. While this created access to a growing investor base, it also introduced operational duplication and the potential to split assets between competing products.
Dual share classes offer an alternative. By allowing mutual fund and ETF share classes to coexist within the same fund, managers can potentially:
For firms with large mutual fund franchises, the structure offers a way to modernize product offerings without abandoning existing assets under management.
While the commercial rationale is straightforward, implementing a dual share class structure is considerably more complex.
Unlike standalone mutual funds and ETFs, both investor groups share the same underlying portfolio. This creates a number of operational, governance and oversight challenges that regulators and industry participants are still working through.
One of the primary concerns is ensuring that costs are allocated fairly between share classes.
Mutual fund investors and ETF investors interact with the fund differently. Mutual fund investors subscribe and redeem directly with the fund, while ETF investors generally trade shares on an exchange. These differences can create costs that originate from one share class but potentially affect the entire fund.
Regulators have placed significant emphasis on ensuring that neither investor group is unfairly subsidizing the other. As a result, managers are developing increasingly sophisticated monitoring and reporting frameworks to demonstrate equitable treatment across both classes.
Fund boards are also expected to play a more active role.
Managers must be able to demonstrate that both share classes continue to operate fairly and that the structure remains in the best interests of all investors. This has created additional oversight requirements and increased scrutiny around how these funds are managed.
Supporting two different investment vehicles within a single fund requires new infrastructure across fund accounting, transfer agency, reporting and compliance functions.
Industry participants have spent much of the past year developing the operational capabilities needed to support these structures at scale, with administrators, custodians and technology providers all investing heavily in new solutions.
Perhaps the most widely discussed challenge associated with dual share classes relates to capital gains distributions.
One of the defining features of many ETFs is their ability to use in-kind creation and redemption mechanisms. Rather than selling securities to meet investor activity, ETFs can often transfer securities directly, helping to limit the realization of capital gains within the fund.
Mutual funds operate differently. When mutual fund investors redeem, the fund typically needs to generate cash. This may require the portfolio manager to sell securities. If those securities have appreciated in value, the sale can create realized capital gains that are distributed to shareholders.
In a dual share class structure, both investor groups share the same portfolio.
As a result, gains generated by activity in the mutual fund share class may affect investors in the ETF share class as well. While there are mechanisms that may help offset some of these effects, the interaction between mutual fund redemptions and ETF tax efficiency remains one of the most closely scrutinized aspects of the structure.
The extent to which this becomes a material issue will likely depend on factors such as investor behavior, redemption activity and the nature of the underlying investment strategy.
Why This Matters
The interaction between mutual fund redemption activity and ETF tax efficiency is likely to be one of the most closely watched aspects of dual share class structures as adoption increases.
The growth of dual share class structures is creating demand for new operational solutions across the fund industry. Transfer agents, administrators, custodians and infrastructure providers are all developing processes designed to support the unique requirements of these structures.
Recent enhancements to industry settlement and processing systems are expected to make it easier for investors to move between mutual fund and ETF share classes, while fund service providers are developing tools to support cost allocation, monitoring and governance requirements.
As adoption increases, the supporting ecosystem is expected to continue evolving alongside it.
While most industry discussion has focused on operational and domestic US tax considerations, dual share class structures may also create considerations from a withholding tax perspective.
Because cross-border dividend income is often subject to withholding tax in the country of investment, changes to fund structure can potentially affect tax treatment, recovery eligibility and reclaim processes. Any implications are likely to depend on the specific structure involved, the jurisdictions concerned and the profile of the underlying investors.
As dual share class structures continue to gain traction, WTax's technical team is actively monitoring developments across the regulatory, operational and tax landscape.
With extensive experience across treaty-based reclaims, domestic exemptions and complex withholding tax recovery opportunities, WTax continually evaluates how market developments may influence treaty entitlement considerations, including limitation of benefits provisions, documentation requirements and claim processes.
Key Takeaway
As dual share class structures gain adoption, understanding their potential impact on withholding tax recovery will be an important area of focus for investors and service providers.
The momentum behind dual share classes shows little sign of slowing. For asset managers, the structure offers an attractive way to participate in the growing ETF market while retaining existing mutual fund assets. For regulators, it presents new oversight challenges. For service providers, it is creating demand for new operational capabilities and infrastructure.
Whether dual share classes ultimately become a mainstream feature of the US fund landscape remains to be seen. What is clear, however, is that they represent one of the most significant developments in fund structuring in recent years.
As adoption grows and the market gains practical experience with these structures, the full operational and tax implications will become more apparent.
In SummaryWhat we know today
Key areas being monitored
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As dual share class structures continue to gain traction, WTax's technical team is actively monitoring developments across the regulatory, operational and tax landscape and thoroughly considering all potential withholding tax related implications.
WTax's combination of in-house technical expertise, proprietary technology and global recovery experience enables clients to navigate evolving tax landscapes while ensuring no reclaim opportunity is overlooked.
As new developments unfold, WTax will work with clients to ensure their withholding tax positions remain optimized and that recovery outcomes are maximized.
To discuss how evolving fund structures may impact your withholding tax position, contact WTax today.