Daily ETF Watch: Legg Mason Plans Index Funds

Legg Mason is one of the largest asset managers in the world, with almost $700 billion in assets under management, yet it has not launched an ETF of its own. It looks like that’s about to change though. The firm recently filed for four index-based ETFs, despite being known as an active manager.

The four funds, which will be subadvised by Legg Mason's subsidiary, QS Investors, are as follows:

• Legg Mason Developed ex-US Diversified Core ETF
• Legg Mason Emerging Markets Diversified Core ETF
• Legg Mason US Diversified Core ETF
• Legg Mason Low Volatility High Dividend ETF

Legg Mason has flirted with ETFs since 2010, when it filed an exemptive relief request for actively managed funds. However, it has yet to launch a product. The funds outlined in this most recent filing fall under the umbrella of the asset manager’s most recent 40-APP, which requested permission to launch self-indexed ETFs. All four of the proposed ETFs will track indexes provided by QS Investors.

The prospectus says that the regional funds—targeting the U.S., developed foreign markets and emerging markets—will cover large-, mid- and small-cap stocks that they will group into cap-weighted “investment categories” according to industry or sector, and in the case of the international funds, geography. Those categories will in turn be grouped based on their correlations into clusters that will be equally weighted.

The low-volatility, high-dividend fund seeks to invest in “profitable U.S. companies with relatively high dividend yields and lower price and earnings volatility,” according to the prospectus. Starting with a universe of the 3,000 largest U.S. stocks, the fund’s underlying index screens out the stocks that have yields that are too high given their earnings and stocks that have not been profitable for the four preceding quarters.

It’s not clear how components are weighted, but they are assigned a “stable yield” score that is based on an individual stock’s dividend yield, with that number adjusted upward if it has below-average volatility and downward if it has above-average volatility. Presumably, that score factors into the weighting of the components.

The ETFs fall firmly in the smart-beta bucket. The smart-beta space has been an entry point for some traditionally active firms that are frustrated by the lack of traction among actively managed ETFs but still want to get a toehold in the ETF arena, most notably J.P. Morgan. Many see smart beta as a sort of hybrid of both active and passive management.

The filing did not include tickers or expense ratios, but all four ETFs are slated to list on the Nasdaq stock market.

Contact Heather Bell at [email protected].