ETF Watch: Legg Mason Launches Emerging Market Fund

November 18, 2016

Today Legg Mason is rolling out an ETF on Bats that targets the emerging market space using the same basic low-volatility, high-dividend methodology the firm has introduced in two other funds. The Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE) completes a three-fund suite and comes with an expense ratio of 0.50%.

Bats Global Markets is the parent company of

Problems To Solve

“When we come up with equity solutions, a lot of times it’s because we see a problem. When we came up with the low-vol, high-div series, it was really to solve two things. One was the challenge of getting income in this market, which in the last seven years has been really hard,” said Mike LaBella, a portfolio manager with Legg Mason subsidiary QS Investors.

The other problem to be solved was economic anxiety, he noted.

“A lot of our clients really have had to hold on to equities longer than they thought; people are living longer; return expectations on fixed income are pretty low. We just finished this 30-year bull market where bonds rallied for 30 years, and now we’re just sitting at this bottom where yields have nowhere to go but up. That means investors have to hold more equity, and that comes with a lot of risk,” LaBella added.

Such investors tend to be very sensitive to volatility, but in searching for income and holding more equities, many people did not focus on the additional risk they were taking on because of that, he noted.

“If they’re in a decumulation phase, they easily can draw past their income and right into their principal, which can force them into a sell-low/hold-high investment strategy, which is not exactly a key to succss. We call that ‘dollar-cost ravaging,'” LaBella said.

Index Construction

LVHE’s underlying index is derived from the MSCI Emerging Markets IMI Index, and looks to target the components of that selection universe offering above-average dividend yields and below-average earnings volatility and price volatility. Volatility and dividend yield are also used to adjust the weightings of the individual securities, according to the prospectus.

The earnings volatility evaluation is fairly unique, according to LaBella.

“We want to make sure that the companies in this portfolio have predictable earnings. We want to make sure they have established business models, that they’re a bit more mature, that they will be able to continue to service that high dividend that they’re paying,” he added.

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