The diversity, liquidity, and transparency of ETF products, and beneficial tax treatment in the US continue to lure many investors away from more traditional mutual fund products, generating keen interest among some fund promoters.

According to independent research and consultancy firm ETFGI, global assets invested in the ETF industry reached a new record of US$19.44 trillion at the end of November, 2025, with assets increasing by 31.0% in the trailing twelve months.

One of the biggest ETF market stories of 2025 saw the US Securities and Exchange Commission (SEC) announce a landmark decision clearing the way for fund managers to offer ETF share classes within existing mutual funds. The change prompted a flurry of applications from mutual fund managers to create new ETF share classes of their existing funds.

Conversion time

With US mutual funds seeing outflows of more than $1trn since the start of 2021¹, direct conversions of these products to ETF structures have also gathered pace over time. Indeed, Morningstar figures suggest the market has seen 190 conversions take place since 2001, with 60 conversions last year alone.

In turn, a growing number of separately managed accounts (SMAs) – professionally managed accounts designed to pursue specific investment strategies – are also being converted to ETFs.

SMAs provide for a highly personalized experience in terms of tax treatment and allow portfolio managers to ‘harvest’ losses by selling loss making investments – with the goal of offsetting wider portfolio gains. The appeal of switching SMAs to an ETF structure in the US again lies in the tax efficiency of the ETF structure. With SMAs, the ability to harvest losses or rebalance portfolio positions without incurring an immediate capital gain can become increasingly difficult over time. The conversion of SMA assets to the ETF provides a tax deferred transfer of these assets. The ETF structure inherently contains a mechanism that allows a manager to rebalance or remove holdings from the portfolio without realizing an immediate capital gain through its unique in-kind process. If a transaction qualifies under Section 351 of the Internal Revenue Code, investors can transfer assets from SMAs into tax efficient ETFs without immediately triggering any fresh capital gains levies².

ETFs can also deliver competitive cost and fee structures, and in some cases, converting funds to an ETF structure can also help SMA promoters target a larger universe of potential investors to build greater scale.

Structural benefits

SMAs can also be pooled within ETF conversion structures to build operational efficiencies and maximize potential cost savings. In some cases, SMA platforms are used to manage thousands of separate client accounts. So far, the majority of SMA to ETF conversions we have seen have centered on the aggregation and transfer of retail accounts.

This approach can provide greater economies of scale when numerous individual smaller accounts combine to reach a much greater size. Through this greater scale ETF investors may, in some cases, find it easier to access some more complex instruments that cannot be obtained via an SMA platform.

Yet converting an SMA to an ETF is not a decision to be entered lightly, with the devil often in the detail of any conversion. Complexities can arise over opinions on tax, exact product requirements (adherence to diversification rules), retention of performance history for transferred positions, accessing letters of authorization and the ability to source reliable cost basis data.

Working with service providers able to demonstrate a clear track record in supporting such conversions can save on time, money, and sleepless nights. It is important that these partners have in-depth knowledge of the often-intricate mechanics of ETFs and the ability to create the necessary ETF ‘shell’ structures for the SMA transfer and the supporting technology to execute with minimal friction.

Throughout the process the service provider must also work closely with any third-party custodians servicing assets for the fund to ensure their seamless transfer to a new third party provider.

Over the past year there is no doubt we have seen greater adoption of SMA to ETF conversions. While this has mainly been a US phenomenon, to date, anecdotal evidence suggests interest in the approach is also growing in Europe. Watch this space!

For more details or questions, please contact Tim Huver.