ETF Watch: Legg Mason Plans Small Cap Fund

April 19, 2017

Legg Mason has filed for a factor-based ETF that will track an index created by its affiliate Royce & Associates. The Legg Mason Small-Cap Quality Value ETF will target small-cap U.S. stocks with below-average valuation and above-average debt coverage and profitability, according to its prospectus. At the same time, the fund’s index will seek to maintain a similar risk profile to the broader U.S. market.

Essentially, the fund targets the small-cap, value and quality factors using Royce’s in-house multifactor scoring system. Companies are compared based on their quality and value characteristics relative to the other companies in their respective sectors.

Momentum & Fundamental Scores

The methodology also relies on a momentum score for each company to determine the timing of additions and deletions, while the fundamental score is used to determine the weightings of the securities within the index.

The methodology limits the weight of individual securities and sectors. No individual stock can represent more than 3% of the index, with sectors limited to 25%. The index is rebalanced quarterly, according to the prospectus.

The filing represents a new direction for the issuer. Legg Mason’s other funds have relied on methodologies that target the low-volatility and high-dividend factors, as well as diversification.

According to the prospectus, the fund will list on Nasdaq, with an expense ratio of 0.60% and SQLV as its ticker.

Contact Heather Bell at [email protected].

 

 

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