ETF Watch: Active Socially Responsible Funds Launch

Legg Mason is rolling out today two ETFs that bring socially responsible investing (also called “ESG,” for environmental, social and governance) and active management together—something that’s extremely rare in the ETF space.

The funds, the ClearBridge Dividend Strategy ESG ETF (YLDE) and the ClearBridge Large Cap Growth ESG ETF (LRGE), are listing on the Nasdaq with expense ratios of 0.59%.

Both ETFs are subadvised by ClearBridge Investments, a Legg Mason affiliate that has 30 years of experience managing socially responsible investments.

According to Mary Jane McQuillen, portfolio manager at ClearBridge, what’s unique about these strategies is what their portfolio managers bring to the plate; namely, vast experience and hands-on engagement with the companies they are looking to invest in.

PMs Work With Companies Directly

The firm’s analysts and portfolio managers not only know and rate companies based on various ESG factors—all considered from a sector perspective—they also work with companies to improve their ESG practices. These folks know a company’s management team and practices well, she says.

“These strategies are not a response to market need or any kind of sales promotion,” McQuillen said. “It’s been 30 years since the integration of ESG into our investment process. That approach has enhanced stock selection, and has shown to improve long-term performance.”

To investors, buying into LRGE and YLDE is essentially actively owning a relatively concentrated portfolio of companies ClearBridge has a lot of conviction in.

Each portfolio should have about 45 to 50 holdings, all of which are considered to be long-term investments that should generate outperformance and rank high in ESG criteria.

Low Turnover

Turnover among holdings is pretty low for actively managed funds, at about 5% to 20% a year, according to ClearBridge data. The average holding period is 16 years in portfolios that are built to last through various cycles.

As McQuillen put it, these are ClearBridge’s “high-conviction, best-ideas portfolios.”

The fundamental, bottom-up process behind these strategies evaluates and rates securities relative to their respective sectors based on things such as workplace policies, employee benefits, environmental management system strength, community involvement, strategic philanthropy, etc.

LRGE, specifically, looks to invest in high-quality companies that have sustainable competitive advantages. YLDE looks for large-cap companies that are rising dividends—dividend growers.

ESG ETFs in the market today are all index-based. The only exception was the active AdvisorShares Global Echo ETF (GIVE). Launched in 2012, it gathered less than $5 million in assets under management, and was shuttered earlier this month.

Today’s launches bring the number of Legg Mason ETFs to 10, three of which are linked to ClearBridge.

Contact Cinthia Murphy at [email protected]