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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-23096
Legg Mason ETF Investment Trust
(Exact name of registrant as specified in charter)
620 Eighth Avenue, 49th Floor, New York, NY 10018
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-877-721-1926
Date of fiscal year end: October 31
Date of reporting period: October 31, 2016
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| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
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| Annual Report | October 31, 2016 |
LEGG MASON
LOW VOLATILITY HIGH DIVIDEND ETF
LVHD
| INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
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Fund objective
The Fund seeks to track the investment results of an index composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility.
Dear Shareholder,
We are pleased to provide the annual report of Legg Mason Low Volatility High Dividend ETF for the period since the Fund’s inception on December 28, 2015 through October 31, 2016. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com. Here you can gain immediate access to market and investment information, including:
| • | Fund net asset value and market price, |
| • | Market insights and commentaries from our portfolio managers, and |
| • | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
Jane Trust, CFA
President and Chief Executive Officer
November 30, 2016
| II | Legg Mason Low Volatility High Dividend ETF |
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Economic review
The pace of U.S. economic activity fluctuated during the period from the Fund’s inception on December 28, 2015 through October 31, 2016 (the “reporting period”). Looking back, the U.S. Department of Commerce reported that fourth quarter 2015 U.S. gross domestic product (“GDP”)i growth was 0.9%. First and second quarter 2016 GDP growth was 0.8% and 1.4%, respectively. The U.S. Department of Commerce’s second reading for third quarter 2016 GDP growth — released after the reporting period ended — was 3.2%. The improvement in GDP growth in the third quarter 2016 reflected an increase in private inventory investment, an acceleration in exports, an upturn in federal government spending and smaller decreases in state and local government spending.
While there was a pocket of weakness in May 2016, job growth in the U.S. was solid overall and a tailwind for the economy during the reporting period. When the period ended on October 31, 2016, the unemployment rate was 4.9%, as reported by the U.S. Department of Labor. The percentage of longer-term unemployed declined over the period. In October 2016, 25.2% of Americans looking for a job had been out of work for more than six months, versus 26.3% when the period began.
After an extended period of maintaining the federal funds rateii at a historically low range between zero and 0.25%, the Federal Reserve Board (the “Fed”)iii increased the rate at its meeting on December 16, 2015. This marked the first rate hike since 2006. In particular, the U.S. central bank raised the federal funds rate to a range between 0.25% and 0.50%. At its meeting that concluded on November 2, 2016 (after the reporting period ended), as well as during the prior meetings of the year, the Fed kept rates on hold. In the Fed’s statement after the November meeting it said, “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
Jane Trust, CFA
President and Chief Executive Officer
November 30, 2016
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.
| i | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| ii | The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. |
| iii | The Federal Reserve Board (the “Fed”) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| Legg Mason Low Volatility High Dividend ETF | III |
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Q. What is the Fund’s investment strategy?
A. Legg Mason Low Volatility High Dividend ETF (the “Fund”) seeks to track the investment results of the QS Low Volatility High Dividend Index (the “Underlying Index”). The Underlying Index seeks to provide more stable income through investments in stocks of profitable U.S. companies with relatively high dividend yields and lower price and earnings volatility. The Underlying Index is based on a proprietary methodology created and sponsored by QS Investors, LLC (“QS”), the Fund’s subadviser. The Underlying Index is composed of stocks of U.S. companies across a wide range of market capitalizations, including the largest 3,000 U.S. stocks as determined by the Solactive US Broad Market Index.
Stocks in the Underlying Index must have demonstrated profitability over the last four fiscal quarters as a whole. Stocks whose yields are not supported by earnings are excluded from the Underlying Index. The methodology calculates a composite “stable yield” score, with the yield of stocks with relatively higher price volatility and earnings volatility adjusted downward and the yield of stocks with relatively lower price volatility and earnings volatility adjusted upward. QS anticipates that the number of component securities in the Underlying Index will range from 50 to 100. As initially constituted and balanced, no individual component of the Underlying Index will exceed 2.5% of the Underlying Index, no individual sector (as defined by QS) will exceed 25% of the Underlying Index, and real estate investment trust (“REIT”)i components as a whole will not exceed 15% of the Underlying Index. The Underlying Index’s components are reconstituted annually and rebalanced quarterly. The composition of the Underlying Index and the Fund after reconstitution and rebalancing may fluctuate and exceed the above Underlying Index limitations due to market movements. The components of the Underlying Index, and the degree to which these components represent certain sectors and industries, may change over time.
The Fund uses a “passive” or indexing investment approach to achieve its investment objective. Unlike many investment companies, the Fund does not try to outperform its Underlying Index and does not seek temporary defensive positions when markets decline or appear overvalued. Indexing may eliminate the chance that the Fund will substantially outperform the Underlying Index and also may reduce some of the risks of active management, such as poor security selection. Indexing seeks to achieve lower costs and better after-tax performance by keeping portfolio turnover low in comparison to actively managed investment companies.
QS may use a representative sampling indexing strategy to manage the Fund. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to that of the Underlying Index. When sampling is used, the securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as return variability, risk, market capitalization and sector exposures) and fundamental characteristics (such as portfolio yield, price/earnings ratios and price/book ratios) similar to those of the Underlying Index. The Fund may or may not hold all of the securities in the Underlying Index. The Fund’s portfolio is rebalanced when the Underlying
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 1 |
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Fund overview (cont’d)
Index is rebalanced or reconstituted. The Fund may trade at times other than when the Underlying Index is rebalanced or reconstituted for a variety of reasons, including when adjustments may be made to its representative sampling process from time to time or when investing cash.
The Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, if any, in securities that compose the Underlying Index.
The Fund may invest up to 20% of its net assets in certain index futures, options, options on index futures, swap contracts or other derivatives related to its Underlying Index and its component securities; cash and cash equivalents; other investment companies, including exchange-traded funds; exchange-traded notes; and in securities and other instruments not included in its Underlying Index but which QS believes will help the Fund track its Underlying Index. The Fund may invest in exchange-traded equity index futures to manage sector exposure and for cash management purposes.
Q. What were the overall market conditions during the Fund’s reporting period?
A. Equity markets started 2016 in risk-off mode as macro events dominated headlines, including economic slowdowns in the U.S., China and many other markets, falling commodity prices and uncertainty over the pace of interest rate increases from the Federal Reserve Board (the “Fed”)ii. Nonetheless, in mid-February 2016 the market made a sharp reversal and rallied into the second calendar quarter of 2016.
After a weakening in employment, U.S. gross domestic product (“GDP”)iii growth and industrial reports over the first two months of the second quarter of 2016, the Fed softened its stance on a near-term rate hike. All these measures improved in June 2016. At the end of the second quarter of 2016, the Fed indicated it would wait to see how the surprise vote for the U.K. referendum to leave the European Union (“Brexit”) would unfold before considering any tightening.
U.S. large cap equities advanced in the third quarter of 2016 after being whipsawed by the Brexit vote in late June 2016. Most of the gains occurred early in the quarter, when several major stock indices rose to new highs before falling back slightly. Industrial commodity stocks saw some strong returns, while oil and gold prices were essentially flat. The Fed continued to be accommodative, postponing the expected rate hike until later in 2016. Globally, markets saw modestly upward trends in manufacturing sentiment.
Leading indicators improved and employment gains continued in October 2016, with the prior month’s gain revised up. Still, the U.S. market underperformed most markets as volatility rose and investors generally focused on risk ahead of the U.S. presidential election.
The Fund uses a passive investment approach to achieve its investment objective, and therefore made no change in investment approach in response to market conditions.
Performance review
For the period since the Fund’s inception on December 28, 2015 through October 31 2016, Legg Mason Low Volatility High Dividend ETF generated a 12.28% return on a net asset value (“NAV”)iv basis and 12.32% based on its market pricev per share.
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The performance table shows the Fund’s total return since the Fund’s inception on December 28, 2015 through October 31, 2016 based on its NAV and market price as of October 31, 2016. The Fund seeks to track the investment results of an index composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility, the QS Low Volatility High Dividend Index, which returned 12.59% for the same period. The Fund’s unmanaged benchmark, the Russell 3000 Indexvi returned 5.20% over the same time frame. The Lipper Multi-Cap Value Funds Category Average1 returned 6.46% for the period December 31, 2015 through October 31, 2016. Please note that Lipper performance returns are based on each fund’s NAV.
| Performance Snapshot as of October 31, 2016 (unaudited) | ||||||||
| 6 Months | Total Return Since Fund Inception* | |||||||
| Legg Mason Low Volatility High Dividend ETF: | ||||||||
$27.55 (NAV) | 3.65 | % | 12.28 | %**† | ||||
$27.56 (Market Price) | 3.65 | % | 12.32 | %**‡ | ||||
| QS Low Volatility High Dividend Index | 3.83 | % | 12.59 | % | ||||
| Russell 3000 Index | 4.18 | % | 5.20 | % | ||||
| Lipper Multi-Cap Value Funds Category Average1 | 3.05 | % | 6.46 | % | ||||
The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Principal value and investment returns will fluctuate so shares, when sold, may be worth more or less than their original cost. Performance data current to the most recent month-end is available at www.leggmason.com/etf.
Investors buy and sell shares of an exchange-traded fund (“ETF”) at market price (not NAV) in the secondary market throughout the trading day. These shares are not individually available for purchase or redemption directly from the ETF. Market price returns shown are based upon the National Best Bid and Offer (“NBBO”)vii at 4:00 p.m. Eastern Time. These returns do not represent investors’ returns had they traded shares at other times. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.
Information showing the number of days the market price of the Fund’s shares was greater than the Fund’s NAV and the number of days it was less than the Fund’s NAV (i.e., premium or discount) for various time periods is available by visiting the Fund’s website at www.leggmason.com/etf.
As of the Fund’s current prospectus dated December 28, 2015, the gross total annual fund operating expense ratio for the Fund was 0.30%.
* The Fund’s inception date is December 28, 2015.
** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors pay on distributions or the sale of shares.
† Total return assumes the reinvestment of all distributions at NAV.
‡ Total return assumes the reinvestment of all distributions at market price.
| 1 | Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended October 31, 2016, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 354 funds for the six-month period and among the 349 funds for the ten-month period in the Fund’s Lipper category. |
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 3 |
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Fund overview (cont’d)
Q. What were the leading contributors to performance?
A. The Fund benefited from the Underlying Index’s overweight to the Utilities sector and underweight to the Health Care sector relative to the benchmark. Securities held within the Financials, Industrials and Consumer Staples sectors proved to be additive to overall performance.
Q. What were the leading detractors from performance?
A. From a sector allocation perspective, the Underlying Index’s relative underweight to the Energy and Information Technology sectors detracted from overall performance. Securities held by the Underlying Index within the Consumer Discretionary and Utilities sectors additionally hampered performance.
Looking for additional information?
The Fund’s daily NAV is available on-line at www.leggmason.com/etf. The Fund is traded under the symbol “LVHD” and its closing market price is available on most financial websites. In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-386-5535 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.
Thank you for your investment in Legg Mason Low Volatility High Dividend ETF. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
QS Investors, LLC
November 20, 2016
RISKS: The Fund is newly organized, with a limited history of operations. Equity securities are subject to market and price fluctuations. Dividends are not guaranteed, and a company may reduce or eliminate its dividend at any time. In rising markets, the value of large-cap stocks may not rise as much as smaller-cap stocks. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. The Fund may focus its investments in certain industries, increasing its vulnerability to market volatility. There is no guarantee that the Fund will achieve a high degree of correlation to the index it seeks to track. The Fund does not seek to outperform the index it tracks, and does not seek temporary defensive positions when markets decline or appear overvalued. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance. Distributions are not guaranteed and are subject to change. Please see the Fund’s prospectus for a more complete discussion of these and other risks, and the Fund’s investment strategies.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. The Fund’s top five sector holdings (as a percentage of net assets) as of October 31, 2016 were: Utilities (23.5%), Industrials (14.5%), Consumer Staples (13.2%), Consumer Discretionary (11.6%) and Real Estate (11.0%). The Fund’s composition may differ over time.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. An index is a statistical composite that tracks a specified financial market, sector or rules-based investment process. Unlike a fund, an index does not actually hold a portfolio of securities and
| 4 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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therefore does not incur the expenses incurred by a fund. These expenses negatively impact fund performance. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
| i | Real estate investment trusts (“REITs”) invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid. |
| ii | The Federal Reserve Board (the “Fed”) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| iii | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| iv | Net Asset Value (“NAV”) is calculated by subtracting total liabilities from total assets and dividing the results by the number of shares outstanding. |
| v | Market Price is determined by supply and demand, it is the price at which an investor purchases or sells shares of the Fund. The Market Price may differ from the Fund’s NAV. |
| vi | The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market. |
| vii | The National Best Bid and Offer (“NBBO”) is the best (lowest) available ask price and the best (highest) available bid price to investors when they buy and sell securities. |
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 5 |
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Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of October 31, 2016 and does not include derivatives such as futures contracts. The composition of the Fund’s investments is subject to change at any time. |
| 6 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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Example
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs such as brokerage commissions paid on purchases and sales of Fund shares; and (2) ongoing costs, including management fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
This example is based on an investment of $1,000 invested on May 1, 2016 and held for the six months ended October 31, 2016.
Actual expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.
Hypothetical example for comparison purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| Based on actual total return1 | Based on hypothetical total return1 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Actual Total Return2 | Beginning Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period3 | Hypothetical Annualized Total Return | Beginning Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period3 | |||||||||||||||||||||||||||||||||||||||||
| 3.65% | $ | 1,000.00 | $ | 1,036.50 | 0.30 | % | $ | 1.54 | 5.00 | % | $1,000.00 | $ | 1,023.63 | 0.30 | % | $ | 1.53 | |||||||||||||||||||||||||||||||||
| 1 | For the six months ended October 31, 2016. |
| 2 | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance figure is no guarantee of future results. |
| 3 | Expenses (net of fee waivers and/or expense reimbursements) are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184), then divided by 366. |
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 7 |
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| Net Asset Value | ||||
| Average annual total returns1 | ||||
| Inception* through 10/31/16 | 12.28 | %† | ||
| Cumulative total returns1 | ||||
| Inception date of 12/28/15 through 10/31/16 | 12.28 | % | ||
| Market Price | ||||
| Average annual total returns2 | ||||
| Inception* through 10/31/16 | 12.32 | %† | ||
| Cumulative total returns2 | ||||
| Inception date of 12/28/15 through 10/31/16 | 12.32 | % | ||
All figures represent past performance and are not a guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Results for longer periods will differ, in some cases, substantially. The returns shown do not reflect the deduction of brokerage commissions or taxes that investors would pay on distributions or the sale of shares. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.
Investors buy and sell shares of the Fund at market price, not NAV, in the secondary market throughout the trading day. These shares are not individually available for purchase or redemption directly from the Fund. The Fund’s per share NAV is the value of one share of the Fund and is calculated by dividing the value of total assets less total liabilities by the number of shares outstanding. The NAV return is based on the NAV of the Fund and the market price return is based on the market price per share of the Fund. Market price returns shown are based upon the National Best Bid and Offer (“NBBO”) at 4:00 p.m. Eastern Time. These returns do not represent investors’ returns had they traded shares at other times. NAV and market price returns assume that dividends and capital gain distributions have been reinvested in the Fund at NAV and market price, respectively. As with other exchange-traded funds, NAV returns and market price returns may differ because of factors such as the supply and demand for Fund shares and investors’ assessment of the underlying value of the Fund’s portfolio securities.
| † | Not annualized. |
| 1 | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. |
| 2 | Assumes the reinvestment of all distributions, including returns of capital, if any, at market price. |
| * | Inception date of the Fund is December 28, 2015. |
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Historical performance
Value of $10,000 invested in
Legg Mason Low Volatility High Dividend ETF vs QS Low Volatility High Dividend Index and Russell 3000 Index† — December 28, 2015 - October 2016
All figures represent past performance and are not a guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Results for longer periods will differ, in some cases, substantially. NAV returns assume that dividends and capital gain distributions have been reinvested in the Fund at NAV. The returns shown do not reflect the deduction of brokerage commissions or taxes that investors would pay on distributions or the sale of shares. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower.
| † | Hypothetical illustration of $10,000 invested in Legg Mason Low Volatility High Dividend ETF on December 28, 2015, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through October 31, 2016. The hypothetical illustration also assumes a $10,000 investment in the QS Low Volatility High Dividend Index and Russell 3000 Index. The Fund’s per share NAV is the value of one share of the Fund and is calculated by dividing the value of total assets less total liabilities by the number of shares outstanding. The NAV return is based on the NAV of the Fund. QS Low Volatility High Dividend Index (the “Underlying Index”), is an index composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility. The Underlying Index is based on a proprietary methodology created and sponsored by QS Investors, LLC, the Fund’s subadviser. The Underlying Index is composed of stocks of U.S. companies across a wide range of market capitalizations, including the largest 3,000 U.S. stocks as determined by the Solactive US Broad Market Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market. The indices are not subject to the same management and trading expenses as a fund. An index is a statistical composite that tracks a specified financial market, sector, or rules-based investment process. Unlike a fund, an index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by a fund. These expenses negatively impact fund performance. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index. |
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 9 |
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October 31, 2016
Legg Mason Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
| Common Stocks — 99.2% | ||||||||||||||||
| Consumer Discretionary — 11.6% | ||||||||||||||||
Automobiles — 3.6% | ||||||||||||||||
Ford Motor Co. | 170,546 | $ | 2,002,210 | |||||||||||||
General Motors Co. | 43,859 | 1,385,944 | ||||||||||||||
Total Automobiles | 3,388,154 | |||||||||||||||
Hotels, Restaurants & Leisure — 5.2% | ||||||||||||||||
Darden Restaurants Inc. | 36,845 | 2,387,188 | ||||||||||||||
DineEquity Inc. | 4,460 | 352,786 | ||||||||||||||
McDonald’s Corp. | 19,690 | 2,216,503 | ||||||||||||||
Total Hotels, Restaurants & Leisure | 4,956,477 | |||||||||||||||
Internet & Direct Marketing Retail — 0.1% | ||||||||||||||||
PetMed Express Inc. | 3,992 | 79,321 | ||||||||||||||
Media — 0.5% | ||||||||||||||||
Regal Entertainment Group, Class A Shares | 21,497 | 462,401 | ||||||||||||||
Specialty Retail — 2.2% | ||||||||||||||||
L Brands Inc. | 29,765 | 2,148,735 | ||||||||||||||
Total Consumer Discretionary | 11,035,088 | |||||||||||||||
| Consumer Staples — 13.2% | ||||||||||||||||
Beverages — 2.4% | ||||||||||||||||
Coca-Cola Co. | 54,395 | 2,306,348 | ||||||||||||||
Household Products — 2.7% | ||||||||||||||||
Procter & Gamble Co. | 29,032 | 2,519,978 | ||||||||||||||
Tobacco — 8.1% | ||||||||||||||||
Altria Group Inc. | 37,835 | 2,501,650 | ||||||||||||||
Philip Morris International Inc. | 24,832 | 2,394,798 | ||||||||||||||
Reynolds American Inc. | 47,469 | 2,614,593 | ||||||||||||||
Universal Corp. | 3,572 | 193,602 | ||||||||||||||
Total Tobacco | 7,704,643 | |||||||||||||||
Total Consumer Staples | 12,530,969 | |||||||||||||||
| Financials — 7.6% | ||||||||||||||||
Banks — 2.9% | ||||||||||||||||
City Holding Co. | 1,356 | 70,878 | ||||||||||||||
Glacier Bancorp Inc. | 6,981 | 197,283 | ||||||||||||||
Old National Bancorp | 20,500 | 301,350 | ||||||||||||||
Park National Corp. | 562 | 54,475 | ||||||||||||||
People’s United Financial Inc. | 83,801 | 1,360,928 | ||||||||||||||
Trustmark Corp. | 7,727 | 213,884 | ||||||||||||||
Umpqua Holdings Corp. | 36,786 | 562,090 | ||||||||||||||
Total Banks | 2,760,888 | |||||||||||||||
See Notes to Financial Statements.
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Legg Mason Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
Insurance — 0.9% | ||||||||||||||||
CNA Financial Corp. | 3,756 | $ | 137,357 | |||||||||||||
Old Republic International Corp. | 41,262 | 695,677 | ||||||||||||||
Total Insurance | 833,034 | |||||||||||||||
Mortgage Real Estate Investment (REITs) — 3.6% | ||||||||||||||||
Anworth Mortgage Asset Corp. | 13,734 | 67,434 | ||||||||||||||
Apollo Commercial Real Estate Finance Inc. | 14,508 | 245,475 | ||||||||||||||
Blackstone Mortgage Trust Inc., Class A Shares | 9,999 | 301,970 | ||||||||||||||
Capstead Mortgage Corp. | 17,279 | 164,323 | ||||||||||||||
Chimera Investment Corp. | 29,384 | 460,447 | ||||||||||||||
MFA Financial Inc. | 44,464 | 325,032 | ||||||||||||||
New York Mortgage Trust Inc. | 14,986 | 88,567 | ||||||||||||||
Pennymac Mortgage Investment Trust | 16,422 | 249,943 | ||||||||||||||
Starwood Property Trust Inc. | 47,012 | 1,045,547 | ||||||||||||||
Two Harbors Investment Corp. | 52,314 | 435,776 | ||||||||||||||
Total Mortgage Real Estate Investment (REITs) | 3,384,514 | |||||||||||||||
Thrifts & Mortgage Finance — 0.2% | ||||||||||||||||
Northwest Bancshares Inc. | 9,792 | 154,126 | ||||||||||||||
Oritani Financial Corp. | 4,321 | 67,624 | ||||||||||||||
Total Thrifts & Mortgage Finance | 221,750 | |||||||||||||||
Total Financials | 7,200,186 | |||||||||||||||
| Health Care — 2.5% | ||||||||||||||||
Biotechnology — 0.1% | ||||||||||||||||
PDL BioPharma Inc. | 38,627 | 124,379 | ||||||||||||||
Health Care Equipment & Supplies — 0.1% | ||||||||||||||||
Meridian Bioscience Inc. | 4,583 | 75,390 | ||||||||||||||
Pharmaceuticals — 2.3% | ||||||||||||||||
Pfizer Inc. | 67,618 | 2,144,167 | ||||||||||||||
Total Health Care | 2,343,936 | |||||||||||||||
| Industrials — 14.5% | ||||||||||||||||
Aerospace & Defense — 2.7% | ||||||||||||||||
Boeing Co. | 17,818 | 2,537,818 | ||||||||||||||
Air Freight & Logistics — 2.5% | ||||||||||||||||
United Parcel Service Inc., Class B Shares | 22,447 | 2,418,889 | ||||||||||||||
Commercial Services & Supplies — 0.1% | ||||||||||||||||
McGrath RentCorp | 2,663 | 80,156 | ||||||||||||||
Electrical Equipment — 4.8% | ||||||||||||||||
Eaton Corp. PLC | 37,421 | 2,386,337 | ||||||||||||||
Emerson Electric Co. | 44,053 | 2,232,606 | ||||||||||||||
Total Electrical Equipment | 4,618,943 | |||||||||||||||
See Notes to Financial Statements.
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 11 |
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Schedule of investments (cont’d)
October 31, 2016
Legg Mason Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
Machinery — 2.7% | ||||||||||||||||
Cummins Inc. | 19,950 | $ | 2,550,009 | |||||||||||||
Trading Companies & Distributors — 1.7% | ||||||||||||||||
Fastenal Co. | 41,189 | 1,605,547 | ||||||||||||||
Total Industrials | 13,811,362 | |||||||||||||||
| Information Technology — 10.5% | ||||||||||||||||
Communications Equipment — 2.6% | ||||||||||||||||
Cisco Systems Inc. | 81,796 | 2,509,501 | ||||||||||||||
IT Services — 6.0% | ||||||||||||||||
International Business Machines Corp. | 15,921 | 2,446,899 | ||||||||||||||
Paychex Inc. | 36,291 | 2,003,263 | ||||||||||||||
Western Union Co. | 61,649 | 1,237,295 | ||||||||||||||
Total IT Services | 5,687,457 | |||||||||||||||
Software — 1.9% | ||||||||||||||||
CA Inc. | 56,966 | 1,751,135 | ||||||||||||||
Total Information Technology | 9,948,093 | |||||||||||||||
| Materials — 0.2% | ||||||||||||||||
Paper & Forest Products — 0.2% | ||||||||||||||||
Schweitzer-Mauduit International Inc. | 5,627 | 207,693 | ||||||||||||||
| Real Estate — 11.0% | ||||||||||||||||
Equity Real Estate Investment Trusts (REITs) — 11.0% | ||||||||||||||||
Agree Realty Corp. | 3,745 | 181,071 | ||||||||||||||
Columbia Property Trust Inc. | 9,104 | 191,912 | ||||||||||||||
Corrections Corp. of America | 12,690 | 183,371 | ||||||||||||||
Crown Castle International Corp. | 25,215 | 2,294,313 | ||||||||||||||
Digital Realty Trust Inc. | 15,694 | 1,466,290 | ||||||||||||||
EastGroup Properties Inc. | 3,112 | 211,336 | ||||||||||||||
EPR Properties | 8,997 | 654,262 | ||||||||||||||
Franklin Street Properties Corp. | 5,602 | 64,815 | ||||||||||||||
Gaming and Leisure Properties Inc. | 14,229 | 467,138 | ||||||||||||||
Liberty Property Trust | 16,088 | 650,438 | ||||||||||||||
LTC Properties Inc. | 4,109 | 205,902 | ||||||||||||||
Monmouth Real Estate Investment Corp. | 4,575 | 62,540 | ||||||||||||||
National Health Investors Inc. | 4,641 | 351,602 | ||||||||||||||
National Retail Properties Inc. | 19,873 | 906,606 | ||||||||||||||
Piedmont Office Realty Trust Inc., Class A Shares | 15,722 | 321,987 | ||||||||||||||
Potlatch Corp. | 3,831 | 147,110 | ||||||||||||||
Select Income REIT | 7,250 | 179,365 | ||||||||||||||
Senior Housing Properties Trust | 31,384 | 667,538 | ||||||||||||||
STORE Capital Corp. | 30,010 | 818,973 | ||||||||||||||
See Notes to Financial Statements.
| 12 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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Legg Mason Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
Equity Real Estate Investment Trusts (REITs) — continued | ||||||||||||||||
WP Carey Inc. | 6,284 | $ | 381,690 | |||||||||||||
Total Real Estate | 10,408,259 | |||||||||||||||
| Telecommunication Services — 4.6% | ||||||||||||||||
Diversified Telecommunication Services — 4.6% | ||||||||||||||||
AT&T Inc. | 60,076 | 2,210,196 | ||||||||||||||
Verizon Communications Inc. | 44,951 | 2,162,143 | ||||||||||||||
Total Telecommunication Services | 4,372,339 | |||||||||||||||
| Utilities — 23.5% | ||||||||||||||||
Electric Utilities — 13.8% | ||||||||||||||||
American Electric Power Co. Inc. | 36,518 | 2,367,827 | ||||||||||||||
Duke Energy Corp. | 29,745 | 2,380,195 | ||||||||||||||
Exelon Corp. | 68,764 | 2,342,789 | ||||||||||||||
Hawaiian Electric Industries Inc. | 10,661 | 314,500 | ||||||||||||||
OGE Energy Corp. | 28,387 | 881,132 | ||||||||||||||
Otter Tail Corp. | 2,147 | 77,185 | ||||||||||||||
PPL Corp. | 67,191 | 2,307,339 | ||||||||||||||
Southern Co. | 46,738 | 2,410,279 | ||||||||||||||
Total Electric Utilities | 13,081,246 | |||||||||||||||
Gas Utilities — 0.2% | ||||||||||||||||
South Jersey Industries Inc. | 6,812 | 201,976 | ||||||||||||||
Multi-Utilities — 9.5% | ||||||||||||||||
Ameren Corp. | 38,440 | 1,920,078 | ||||||||||||||
Consolidated Edison Inc. | 31,663 | 2,392,140 | ||||||||||||||
Dominion Resources Inc. | 32,728 | 2,461,145 | ||||||||||||||
Public Service Enterprise Group Inc. | 54,677 | 2,300,808 | ||||||||||||||
Total Multi-Utilities | 9,074,171 | |||||||||||||||
Total Utilities | 22,357,393 | |||||||||||||||
Total Investments before Short-Term Investments (Cost — $95,173,555) |
| 94,215,318 | ||||||||||||||
| Rate | ||||||||||||||||
| Short-Term Investments — 0.4% | ||||||||||||||||
State Street Institutional U.S. Government Money Market Fund, Premier Class (Cost — $404,329) | 0.251 | % | 404,329 | 404,329 | ||||||||||||
Total Investments — 99.6% (Cost — $95,577,884#) | 94,619,647 | |||||||||||||||
Other Assets in Excess of Liabilities — 0.4% | 425,560 | |||||||||||||||
Total Net Assets — 100.0% | $ | 95,045,207 | ||||||||||||||
| # | Aggregate cost for federal income tax purposes is $95,869,849. |
Abbreviation used in this schedule: | ||
| REIT | — Real Estate Investment Trust | |
See Notes to Financial Statements.
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 13 |
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Statement of assets and liabilities
October 31, 2016
| Assets: | ||||
Investments, at value (Cost — $95,577,884) | $ | 94,619,647 | ||
Receivable for securities sold | 226,875 | |||
Dividends and interest receivable | 195,013 | |||
Deposits with brokers for open futures contracts | 27,852 | |||
Total Assets | 95,069,387 | |||
| Liabilities: | ||||
Investment management fee payable | 22,650 | |||
Payable to broker — variation margin on open futures contracts | 1,530 | |||
Total Liabilities | 24,180 | |||
| Total Net Assets | $ | 95,045,207 | ||
| Net Assets: | ||||
Par value (Note 5) | $ | 35 | ||
Paid-in capital in excess of par value | 96,112,098 | |||
Undistributed net investment income | 204,563 | |||
Accumulated net realized loss on investments and futures contracts | (311,709) | |||
Net unrealized depreciation on investments and futures contracts | (959,780) | |||
| Total Net Assets | $ | 95,045,207 | ||
| Shares Outstanding | 3,450,000 | |||
| Net Asset Value | $27.55 | |||
See Notes to Financial Statements.
| 14 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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For the Period Ended October 31, 2016†
| Investment Income: | ||||
Dividends and distributions | $ | 1,348,093 | ||
Return of capital (Note 1(d)) | (56,568) | |||
Net Dividends and Distributions | 1,291,525 | |||
Interest | 64 | |||
Total Investment Income | 1,291,589 | |||
| Expenses: | ||||
Investment management fee (Note 2) | 104,025 | |||
Total Expenses | 104,025 | |||
| Net Investment Income | 1,187,564 | |||
| Realized and Unrealized Gain (Loss) on Investments and Futures Contracts (Notes 1, 3 and 4): | ||||
Net Realized Gain (Loss) From: |
| |||
Investment transactions | 740,043 | |||
REIT distributions | 48,439 | |||
Futures contracts | (2,755) | |||
Net Realized Gain | 785,727 | |||
Change in Net Unrealized Appreciation (Depreciation) From: |
| |||
Investments | (958,237) | |||
Futures contracts | (1,543) | |||
Change in Net Unrealized Appreciation (Depreciation) | (959,780) | |||
| Net Loss on Investments and Futures Contracts | (174,053) | |||
| Increase in Net Assets From Operations | $ | 1,013,511 | ||
| † | For the period December 28, 2015 (inception date) to October 31, 2016. |
See Notes to Financial Statements.
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 15 |
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Statement of changes in net assets
| For the Period Ended October 31, | 2016† | |||
| Operations: | ||||
Net investment income | $ | 1,187,564 | ||
Net realized gain | 785,727 | |||
Change in net unrealized appreciation (depreciation) | (959,780) | |||
Increase in Net Assets From Operations | 1,013,511 | |||
| Distributions to Shareholders From (Note 1): | ||||
Net investment income | (983,001) | |||
Decrease in Net Assets From Distributions to Shareholders | (983,001) | |||
| Fund Share Transactions (Note 5): | ||||
Net proceeds from sale of shares (4,000,001 shares issued) | 110,587,826 | |||
Cost of shares repurchased (550,001 shares repurchased) | (15,573,129) | |||
Increase in Net Assets From Fund Share Transactions | 95,014,697 | |||
Increase in Net Assets | 95,045,207 | |||
| Net Assets: | ||||
Beginning of period | — | |||
End of period* | $ | 95,045,207 | ||
*Includes undistributed net investment income of: | $204,563 | |||
| † | For the period December 28, 2015 (inception date) to October 31, 2016. |
See Notes to Financial Statements.
| 16 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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| For a share of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted: | ||||
| 20161,2 | ||||
| Net asset value, beginning of period | $24.96 | |||
| Income from operations: | ||||
Net investment income | 0.80 | |||
Net realized and unrealized gain | 2.26 | 3 | ||
Total income from operations | 3.06 | |||
| Less distributions from: | ||||
Net investment income | (0.47) | |||
Total distributions | (0.47) | |||
| Net asset value, end of period | $27.55 | |||
Total return, at NAV4 | 12.28 | % | ||
| Net assets, end of period (000s) | $95,045 | |||
| Ratios to average net assets: | ||||
Gross expenses5 | 0.30 | % | ||
Net expenses5 | 0.30 | |||
Net investment income5 | 3.42 | |||
| Portfolio turnover rate6 | 48 | % | ||
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the period December 28, 2015 (inception date) to October 31, 2016. |
| 3 | Calculation of the net gain per share (both realized and unrealized) does not correlate to the aggregate realized and unrealized losses presented in the Statement of Operations due to the timing of sales and repurchases of Fund shares in relation to fluctuating market values of the investments of the Fund. |
| 4 | Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 5 | Annualized. |
| 6 | Portfolio turnover excludes the value of portfolio securities received or delivered as a result of in-kind fund share transactions. |
See Notes to Financial Statements.
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 17 |
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1. Organization and significant accounting policies
Legg Mason Low Volatility High Dividend ETF (the “Fund”) is a separate diversified investment series of Legg Mason ETF Equity Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.
The Fund is an exchange-traded fund (“ETF”). ETFs are funds that trade like other publicly-traded securities. The Fund is designed to track an index. Similar to shares of an index mutual fund, each share of the Fund represents an ownership interest in an underlying portfolio of securities intended to track an index. Unlike shares of a mutual fund, which can be bought from and redeemed by the issuing fund by all shareholders at a price based on net asset value (“NAV”), shares of the Fund may be directly purchased from and redeemed by the Fund at NAV solely by certain large institutional investors who have entered into agreements with the Fund’s distributor (“Authorized Participants”). Also unlike shares of a mutual fund, shares of the Fund are listed on a national securities exchange and trade in the secondary market at market prices that change throughout the day.
Shares of the Fund are listed and traded at market prices on The NASDAQ Stock Market, LLC. The market price for the Fund’s shares may be different from the Fund’s NAV. The Fund issues and redeems shares at NAV only in blocks of a specified number of shares or multiples thereof (“Creation Units”). Only Authorized Participants may purchase or redeem Creation Units directly with the Fund at NAV. Creation Units are issued and redeemed generally in-kind for a basket of securities and/or cash. Except when aggregated in Creation Units, shares of the Fund are not redeemable securities. Shareholders who are not Authorized Participants may not redeem shares directly from the Fund at NAV.
The Fund seeks to track the investment results of the QS Low Volatility High Dividend Index (the “Underlying Index”). The Underlying Index seeks to provide more stable income through investments in stocks of profitable U.S. companies with relatively high dividend yields and lower price and earnings volatility. The Underlying Index is based on a proprietary methodology created and sponsored by QS Investors, LLC, the Fund’s subadviser.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative
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instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Trustees.
The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 19 |
Table of Contents
Notes to financial statements (cont’d)
affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Trustees quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
| • | Level 1 — quoted prices in active markets for identical investments |
| • | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| • | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
| ASSETS | ||||||||||||||||
| Description | Quoted Prices (Level 1) | Other Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Common stocks† | $ | 94,215,318 | — | — | $ | 94,215,318 | ||||||||||
| Short-term investments† | 404,329 | — | — | 404,329 | ||||||||||||
| Total investments | $ | 94,619,647 | — | — | $ | 94,619,647 | ||||||||||
| LIABILITIES | ||||||||||||||||
| Description | Quoted Prices (Level 1) | Other Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Other financial instruments: | ||||||||||||||||
Futures contracts | $ | 1,543 | — | — | $ | 1,543 | ||||||||||
| † | See Schedule of Investments for additional detailed categorizations. |
| 20 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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(b) Futures contracts. The Portfolio uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(c) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(d) REIT distributions. The character of distributions received from Real Estate Investment Trusts (‘‘REITs’’) held by the Fund is generally comprised of net investment income, capital gains, and return of capital. It is the policy of the Fund to estimate the character of distributions received from underlying REITs based on historical data provided by the REITs. After each calendar year end, REITs report the actual tax character of these distributions. Differences between the estimated and actual amounts reported by the REITs are reflected in the Fund’s records in the year in which they are reported by the REITs by adjusting related investment cost basis, capital gains and income, as necessary.
(e) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared and paid on a quarterly basis. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(f) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 21 |
Table of Contents
Notes to financial statements (cont’d)
(g) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:
| Accumulated Net Realized Loss | Paid-in Capital | |||||||
| (a) | $ | (1,097,436) | $ | 1,097,436 | ||||
| (a) | Reclassifications are due to book/tax differences in the treatment of an in-kind distribution of securities. |
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and QS Investors, LLC (“QS”) is the Fund’s subadviser. Western Asset Management Company (“Western Asset”) manages the portion of the Fund’s cash and short-term instruments allocated to it. LMPFA, QS and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund under what is a unitary fee structure. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. The Fund is responsible for paying interest expenses, taxes, brokerage expenses, future 12b-1 fees (if any), acquired fund fees and expenses, extraordinary expenses and the management fee payable to LMPFA under the investment management agreement. LMPFA has agreed to pay all of the Fund’s organization and offering costs.
Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.30% of the Fund’s average daily net assets.
As compensation for its subadvisory services, LMPFA pays QS 90% of the management fee paid by the Fund to LMPFA, net of (i) all fees and expenses incurred by LMPFA under the investment management agreement (including without limitation any subadvisory fee paid to another subadviser to the Fund) and (ii) expense waivers, if any, and reimbursements. LMPFA pays Western Asset a fee of 0.02% of the portion of the Fund’s average daily net assets allocated to Western Asset for the management of cash and other short-term instruments, net of expense waivers, if any, and reimbursements.
Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the distributor of Creation Units for the Fund on an agency basis.
The Fund’s Board of Trustees has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan, the Fund is authorized to pay service and/or distribution fees calculated at an annual rate of up to 0.25% of its average daily net assets. No service and/or distribution fees are currently paid by the Fund, and there are no current plans to impose these fees.
All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
| 22 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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3. Investments
During the period ended October 31, 2016, the aggregate cost of purchases and proceeds from sales of investments (excluding in-kind transactions and short-term investments) were as follows:
| Purchases | $ | 20,147,144 | ||
| Sales | 20,328,779 |
During the period ended October 31, 2016, in-kind transactions (see Note 5) were as follows:
| Contributions | $ | 110,544,419 | ||
| Redemptions | 15,871,841 | |||
| Realized gain (loss)* | 1,097,456 |
| * | Net realized gains on redemptions in-kind are not taxable to the remaining shareholders of the Fund. |
The in-kind contributions and in-kind redemptions shown in this table may not agree with the Fund Share Transactions on the Statement of Changes in Net Assets. This table represents the accumulation of the Fund’s daily net shareholder transactions while the Statement of Changes in Net Assets reflects gross shareholder transactions including any cash component of the transactions.
At October 31, 2016, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| Gross unrealized appreciation | $ | 1,648,639 | ||
| Gross unrealized depreciation | (2,898,841) | |||
| Net unrealized depreciation | $ | (1,250,202) |
At October 31, 2016, the Fund had the following open futures contracts:
| Number of Contracts | Expiration Date | Basis Value | Market Value | Unrealized Depreciation | ||||||||||||||||
| Contracts to Buy: | ||||||||||||||||||||
| E-mini S&P 500 Index | 5 | 12/16 | $ | 531,568 | $ | 530,025 | $ | (1,543) | ||||||||||||
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at October 31, 2016.
| LIABILITY DERIVATIVES1 | ||||
| Equity Risk | ||||
| Futures contracts2 | $ | 1,543 | ||
| 1 | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation). |
| 2 | Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities. |
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 23 |
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Notes to financial statements (cont’d)
The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the period ended October 31, 2016. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
| AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED | ||||
| Equity Risk | ||||
| Futures contracts | $ | (2,755) | ||
| CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED | ||||
| Equity Risk | ||||
| Futures contracts | $ | (1,543) | ||
During the period ended October 31, 2016, the volume of derivative activity for the Fund was as follows:
| Average Market Value | ||||
| Futures contracts (to buy) | $ | 126,980 | ||
The following table presents by financial instrument, the Fund’s derivative liabilities net of the related collateral pledged by the Fund at October 31, 2016:
| Gross Amount of Derivative Liabilities in the Statement of Assets and Liabilities1 | Collateral Pledged2,3 | Net Amount | ||||||||||
| Futures contracts4 | $ | 1,530 | $ | (1,530) | — | |||||||
| 1 | Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. |
| 2 | Gross amounts are not offset in the Statement of Assets and Liabilities. |
| 3 | In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization. |
| 4 | Amount represents the current day’s variation margin as reported in the Statement of Assets and Liabilities. It differs from the cumulative appreciation (depreciation) presented in the previous table. |
5. Fund share transactions
At October 31, 2016, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. Fund shares are issued and redeemed by the Fund only in Creation Units or Creation Unit aggregations, where 50,000 shares of the Fund constitute a Creation Unit. Such transactions are generally on an in-kind basis, with a separate cash payment, which is a balancing cash component to equate the transaction to the net asset value per share of the Fund on the transaction date. Transactions in capital shares of the Fund are disclosed in detail in the Statement of Changes in Net Assets. Authorized Participants are subject to standard creation and redemption transaction fees to offset transfer and other transaction costs associated with the issuance and redemption of
| 24 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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Creation Units. Creations and redemptions for cash (when cash creations and redemptions are available or specified) may be subject to an additional variable fee.
6. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal period ended October 31, was as follows:
| 2016 | ||||
| Distributions paid from: | ||||
| Ordinary income | $ | 983,001 | ||
As of October 31, 2016, the components of accumulated earnings (losses) on a tax basis were as follows:
| Undistributed ordinary income — net | $ | 204,563 | ||
| Deferred capital losses* | (21,287) | |||
| Other book/tax temporary differences(a) | 1,543 | |||
| Unrealized appreciation (depreciation)(b) | (1,251,745) | |||
| Total accumulated earnings (losses) — net | $ | (1,066,926) |
| * | These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains. |
| (a) | Other book/tax temporary differences are attributable to the realization for tax purposes of unrealized gains (losses) on certain futures contracts. |
| (b) | The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax deferral of losses on wash sales. |
7. Recent accounting pronouncement
In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, the “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Fund’s financial statements and related disclosures.
| Legg Mason Low Volatility High Dividend ETF 2016 Annual Report | 25 |
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Report of independent registered public accounting firm
The Board of Trustees and Shareholders
Legg Mason ETF Equity Trust:
We have audited the accompanying statement of assets and liabilities of Legg Mason Low Volatility High Dividend ETF (the “Fund”), a series of Legg Mason ETF Equity Trust, including the schedule of investments, as of October 31, 2016, and the related statements of operations, changes in net assets, and the financial highlights for the period from December 28, 2015 (inception date) to October 31, 2016. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Low Volatility High Dividend ETF as of October 31, 2016, the results of its operations, the changes in its net assets, and the financial highlights for the period from December 28, 2015 (inception date) to October 31, 2016, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 21, 2016
| 26 | Legg Mason Low Volatility High Dividend ETF 2016 Annual Report |
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Additional information (unaudited)
Information about Trustees and Officers
The business and affairs of Legg Mason Low Volatility High Dividend ETF (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Trustees. The business address of each Trustee is c/o Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Trustees and officers of the Fund is set forth below.
The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling the Fund at 1-888-386-5535.
| Independent Trustees† | ||
| Paul R. Ades | ||
| Year of birth | 1940 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1983 | |
| Principal occupation(s) during past five years | Paul R. Ades, PLLC (law firm) (since 2000) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| Andrew L. Breech | ||
| Year of birth | 1952 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1991 | |
| Principal occupation(s) during past five years | President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| Dwight B. Crane | ||
| Year of birth | 1937 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1981 | |
| Principal occupation(s) during past five years | Professor Emeritus, Harvard Business School (since 2007); formerly, Professor, Harvard Business School (1969 to 2007); Independent Consultant (since 1969) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| Legg Mason Low Volatility High Dividend ETF | 27 |
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Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| Independent Trustees cont’d | ||
| Althea L. Duersten | ||
| Year of birth | 1951 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 2014 | |
| Principal occupation(s) during past five years | Retired (since 2011); formerly, Chief Investment Officer, North America, JPMorgan Chase (investment bank) and member of JPMorgan Executive Committee (2007 to 2011) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| Frank G. Hubbard | ||
| Year of birth | 1937 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1993 | |
| Principal occupation(s) during past five years | President, Fealds, Inc. (business development) (since 2016); formerly, President, Avatar International Inc. (business development) (1998 to 2015) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| Howard J. Johnson | ||
| Year of birth | 1938 | |
| Position(s) with Trust | Trustee and Chairman | |
| Term of office1 and length of time served2 | From 1981 to 1998 and since 2000 (Chairman since 2013) | |
| Principal occupation(s) during past five years | Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| Jerome H. Miller | ||
| Year of birth | 1938 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1995 | |
| Principal occupation(s) during past five years | Retired | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
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| Independent Trustees cont’d | ||
| Ken Miller | ||
| Year of birth | 1942 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1983 | |
| Principal occupation(s) during past five years | Retired; formerly, President, Young Stuff Apparel Group, Inc. (apparel manufacturer), division of Li & Fung (1963 to 2012) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | None | |
| John J. Murphy | ||
| Year of birth | 1944 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 2002 | |
| Principal occupation(s) during past five years | Founder and Senior Principal, Murphy Capital Management (investment management) (since 1983) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | Trustee, UBS Funds (52 funds) (since 2008); Trustee, Consulting Group Capital Markets Funds (11 funds) (since 2002); Director, Fort Dearborn Income Securities, Inc. (since 2013); formerly, Director, Nicholas Applegate Institutional Funds (12 funds) (2005 to 2010) | |
| Thomas F. Schlafly | ||
| Year of birth | 1948 | |
| Position(s) with Trust | Trustee | |
| Term of office1 and length of time served2 | Since 1983 | |
| Principal occupation(s) during past five years | Chairman, The Saint Louis Brewery, LLC (brewery) (since 2012); formerly, President, The Saint Louis Brewery, Inc. (1989 to 2012); Partner, Thompson Coburn LLP (law firm) (since 2009) | |
| Number of funds in fund complex overseen by Trustee | 46 | |
| Other board memberships held by Trustee during past five years | Director, Citizens National Bank of Greater St. Louis (since 2006) | |
| Legg Mason Low Volatility High Dividend ETF | 29 |
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Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| Interested Trustee and Officer | ||
| Jane Trust3 | ||
| Year of birth | 1962 | |
| Position(s) with Trust | Trustee, President and Chief Executive Officer | |
| Term of office1 and length of time served2 | Since 2015 | |
| Principal occupation(s) during past five years | Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2016); Officer and/or Trustee/Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Vice President of LMPFA (2015); Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007) | |
| Number of funds in fund complex overseen by Trustee | 152 | |
| Other board memberships held by Trustee during past five years | None | |
| Additional Officers | ||
Ted P. Becker Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| Year of birth | 1951 | |
| Position(s) with Trust | Chief Compliance Officer | |
| Term of office1 and length of time served2 | Since 2007 | |
| Principal occupation(s) during past five years | Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) | |
Susan Kerr Legg Mason | ||
| Year of birth | 1949 | |
| Position(s) with Trust | Chief Anti-Money Laundering Compliance Officer | |
| Term of office1 and length of time served2 | Since 2013 | |
| Principal occupation(s) during past five years | Assistant Vice President of Legg Mason & Co. and Legg Mason Investor Services, LLC (“LMIS”) (since 2010); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2013) and Anti-Money Laundering Compliance Officer of LMIS (since 2012); Senior Compliance Officer of LMIS (since 2011); formerly, AML Consultant, DTCC (2010); AML Consultant, Rabobank Netherlands, (2009); First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008) | |
| 30 | Legg Mason Low Volatility High Dividend ETF |
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| Additional Officers cont’d | ||
Jenna Bailey Legg Mason | ||
| Year of birth | 1978 | |
| Position(s) with Trust | Identity Theft Prevention Officer | |
| Term of office1 and length of time served2 | Since 2015 | |
| Principal occupation(s) during past five years | Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011 to 2013); Risk Manager of U.S. Distribution of Legg Mason & Co. (2007 to 2011) | |
Robert I. Frenkel Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1954 | |
| Position(s) with Trust | Secretary and Chief Legal Officer | |
| Term of office1 and length of time served2 | Since 2007 | |
| Principal occupation(s) during past five years | Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel — U.S. Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) | |
Thomas C. Mandia Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1962 | |
| Position(s) with Trust | Assistant Secretary | |
| Term of office1 and length of time served2 | Since 2007 | |
| Principal occupation(s) during past five years | Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers) | |
| Legg Mason Low Volatility High Dividend ETF | 31 |
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Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| Additional Officers cont’d | ||
Richard F. Sennett Legg Mason 100 International Drive, 7th Floor, Baltimore, MD 21202 | ||
| Year of birth | 1970 | |
| Position(s) with Trust | Principal Financial Officer | |
| Term of office1 and length of time served2 | Since 2011 | |
| Principal occupation(s) during past five years | Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and since 2013); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007) | |
Christopher Berarducci Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| Year of birth | 1974 | |
| Position(s) with Trust | Treasurer | |
| Term of office1 and length of time served2 | Since 2014 | |
| Principal occupation(s) during past five years | Director of Legg Mason & Co. (since 2015); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Vice President of Legg Mason & Co. (2011 to 2015); Assistant Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) | |
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| Year of birth | 1951 | |
| Position(s) with Trust | Senior Vice President | |
| Term of office1 and length of time served2 | Since 2007 | |
| Principal occupation(s) during past five years | Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, Senior Vice President of LMFAM (2013 to 2015) | |
| † | Trustees who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”). |
| 1 | Each Trustee and officer serves until his or her respective successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal. |
| 2 | Indicates the earliest year in which the Trustee became a board member for a fund in the Legg Mason fund complex or the officer took such office. |
| 3 | Ms. Trust is an “interested person” of the Fund, as defined in the 1940 Act, because of her position with LMPFA and/or certain of its affiliates. |
| 32 | Legg Mason Low Volatility High Dividend ETF |
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Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable period ended October 31, 2016:
| Record date: | 3/29/2016 | 6/28/2016 | 9/28/2016 | |||||||||
| Payable date: | 3/31/2016 | 6/30/2016 | 9/30/2016 | |||||||||
| Ordinary income: | ||||||||||||
Qualified dividend income for individuals | 81.53 | % | 81.53 | % | 81.53 | % | ||||||
Dividends qualifying for the dividends | ||||||||||||
received deduction for corporations | 80.12 | % | 80.12 | % | 80.12 | % |
Please retain this information for your records.
| Legg Mason Low Volatility High Dividend ETF | 33 |
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Legg Mason
Low Volatility High Dividend ETF
Trustees
Paul R. Ades
Andrew L. Breech
Dwight B. Crane
Althea L. Duersten
Frank G. Hubbard
Howard J. Johnson
Chairman
Jerome H. Miller
Ken Miller
John J. Murphy
Thomas F. Schlafly
Jane Trust
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadviser
QS Investors, LLC
Custodian
State Street Bank & Trust Company
Transfer agent
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Independent registered public accounting firm
KPMG LLP
345 Park Avenue
New York, NY 10154
Legg Mason Low Volatility High Dividend ETF
The Fund is a separate investment series of Legg Mason ETF Equity Trust, a Maryland statutory trust.
Legg Mason Low Volatility High Dividend ETF
Legg Mason Funds
620 Eighth Avenue, 49th Floor
New York, NY 10018
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q, shareholders can call the Fund at 1-888-386-5535.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling the Fund at 1-888-386-5535, (2) at www.leggmason.com/etf and (3) on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of Legg Mason Low Volatility High Dividend ETF. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.
Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.
www.leggmason.com
© 2016 Legg Mason Investor Services, LLC
Member FINRA, SIPC
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ETF Index Disclaimers
Solactive AG does not sponsor, promote, sell or support in any manner the Legg Mason Low Volatility High Dividend ETF (the “Fund”). Solactive AG does not offer any express or implicit guarantee or assurance either with regard to the results of using the Solactive US Broad Market Index (the “Solactive Index”) and/or Solactive Index trade mark or the Solactive Index Price at any time or in any other respect. The Solactive Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Solactive Index is calculated correctly. Irrespective of its obligations towards the Fund, Solactive AG has no obligation to point out errors in the Solactive Index to third parties including but not limited to investors and/or financial intermediaries of the Fund. Neither publication of the Solactive Index by Solactive AG nor the licensing of the Solactive Index or Solactive Index trade mark for the purpose of use in connection with the Fund constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this Fund.
QS Investors, LLC (“QS”) does not guarantee the accuracy and/or the completeness of the Solactive Index or any data included therein, and QS shall not have any liability for any errors, omissions or interruptions therein. QS makes no warranty, express or implied, as to results to be obtained by the Fund, owners of the shares of the Fund or any other person or entity from the use of the Solactive Index, trading based on the Solactive Index, or any data included therein, either in connection with the Fund or for any other use. QS makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Solactive Index or any data included therein. Without limiting any of the foregoing, in no event shall either QS have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits) arising out of matters relating to the use of the Solactive Index, even if notified of the possibility of such damages.
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www.leggmason.com
© 2016 Legg Mason Investor Services, LLC Member FINRA, SIPC
ETFF323381 12/16 SR16-2953
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| ITEM 2. | CODE OF ETHICS. |
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Trustees of the registrant has determined that Dwight B. Crane possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Dwight B. Crane as the Audit Committee’s financial expert. Dwight B. Crane is an “independent” Trustees pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
a) Audit Fees. The aggregate fees billed in the fiscal period ending October 31, 2016 (the “Reporting Period”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Period, were $20,000 in 2016.
b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in 2016.
(c) Tax Fees. The aggregate fees billed in the Reporting Period for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $0 in 2016. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Period that required pre-approval by the Audit Committee.
(d) All Other Fees. The aggregate fees for other fees billed in the Reporting Period for products and services provided by the Auditor were $0 in October 31, 2016, other than the services reported in paragraphs (a) through (c) of this item for the Legg Mason ETF Investment Trust.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Legg Mason ETF Investment Trust requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of
Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
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The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Legg Mason ETF Investment Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% for 2016; Tax Fees were 100% for 2016; and Other Fees were 100% for 2016.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason ETF Investment Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason ETF Investment Trust during the reporting period were $0 in 2016.
(h) Yes. Legg Mason ETF Investment Trust’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Legg Mason ETF Investment Trust or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
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| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:
Paul R. Ades
Andrew L. Breech
Dwight B. Crane
Althea L. Duersten
Frank G. Hubbard
Howard J. Johnson
Jerome H. Miller
Ken Miller
John J. Murphy
Thomas F. Schlafly
b) Not applicable
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 9. | PURCHASES OF SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
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| ITEM 12. | EXHIBITS. |
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Legg Mason ETF Investment Trust
| By: | /s/ Jane Trust | |
| Jane Trust | ||
| Chief Executive Officer | ||
| Date: | March 29, 2017 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Jane Trust | |
| Jane Trust | ||
| Chief Executive Officer | ||
| Date: | March 29, 2017 | |
| By: | /s/ Richard F. Sennett | |
| Richard F. Sennett | ||
| Principal Financial Officer | ||
| Date: | March 29, 2017 | |