Cboe Global Markets has formally requested approval from the United States Securities and Exchange Commission (SEC) for a rule change that would enable issuers to merge exchange-traded funds (ETFs) and mutual funds.

As reported by Reuters on April 4, Cboe submitted a 19b-4 form seeking authorization to introduce an ETF share class into existing mutual funds, thereby establishing a multi-share class fund structure. Should the SEC greenlight the proposal, it would allow issuers to amalgamate and offer similar mutual funds and ETFs within a single investment vehicle.

ETF analyst Todd Sohn from Strategas LLC informed Reuters that the approval of Cboe's request could lead to a significant increase in both the number of ETFs and ETF assets.

While mutual funds and ETFs operate differently and are subject to distinct regulatory frameworks, mutual funds are typically traded at the end of the trading day at a price based on the fund's net asset value, calculated after market closure. Conversely, ETFs trade on exchanges throughout the trading day at market prices akin to stocks, fluctuating accordingly. If the rule change is sanctioned, it could potentially facilitate the inclusion of Bitcoin ETF shares into a mutual fund's portfolio, providing exposure to the digital asset.

Although this proposed system isn't novel, the Vanguard Group has employed a patented investment strategy since 2001, enabling a unique "share class" structure within their ETFs. This approach allowed Vanguard to offer ETFs as a share class of their existing mutual funds, sharing 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 subsequently sought regulatory approval to replicate this model. T. Rowe Price and JPMorgan have also shown interest in adopting a similar approach.

The SEC must make a decision on Cboe's application within 240 days. Bloomberg ETF analyst Eric Balchunas remarked that the filing presents issuers with an opportunity to prompt a response from the SEC on their applications.

As per Mordor Intelligence, the North American ETF market is anticipated to surpass $8 trillion in 2024, with an estimated compound annual growth rate of 14%, reaching $15.52 trillion by 2029.