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, 2018
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
| Annual Report | October 31, 2018 |
LEGG MASON
INTERNATIONAL LOW VOLATILITY HIGH DIVIDEND ETF
LVHI
| INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
Fund objective
The Fund seeks to track the investment results of an index composed of publicly traded equity securities of developed markets outside of the United States with relatively high yield and low price and earnings volatility while mitigating exposure to fluctuations between the values of the U.S. dollar and other international currencies.
Dear Shareholder,
We are pleased to provide the annual report of Legg Mason International Low Volatility High Dividend ETF for the twelve-month reporting period ended October 31, 2018. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how these conditions 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, 2018
| II | Legg Mason International Low Volatility High Dividend ETF |
Economic review
Economic activity in the U.S. was mixed during the twelve months ended October 31, 2018 (the “reporting period”). Looking back, the U.S. Department of Commerce reported that fourth quarter 2017 and first quarter 2018 U.S. gross domestic product (“GDP”)i growth was 2.3% and 2.2%, respectively. GDP growth then accelerated to 4.2% during the second quarter of 2018 — the strongest reading since the third quarter of 2014. Finally, the U.S. Department of Commerce’s second reading for third quarter 2018 GDP growth — released after the reporting period ended — was 3.5%. The deceleration in GDP growth in the third quarter of 2018 reflected a downturn in exports and decelerations in nonresidential fixed investment and personal consumption expenditures. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.
Job growth in the U.S. was solid overall and supported the economy during the reporting period. As reported by the U.S. Department of Labor, when the reporting period ended on October 31, 2018, the unemployment rate was 3.7%, versus 4.1% when the period began. October 2018’s reading equaled the lowest unemployment rate since 1969. The percentage of longer-term unemployed also declined during the reporting period. In October 2018, 22.5% of Americans looking for a job had been out of work for more than six months, versus 23.8% when the period began.
Turning to the global economy, in its October 2018 World Economic Outlook, the International Monetary Fund (“IMF”)ii said, “Global growth for 2018–19 is projected to remain steady at its 2017 level, but its pace is less vigorous than projected in April [2018] and it has become less balanced. Downside risks to global growth have risen in the past six months and the potential for upside surprises has receded.” From a regional perspective, the IMF projects 2018 growth in the Eurozone will be 2.0%, versus 2.4% in 2017. Japan’s economy is expected to expand 1.1% in 2018, compared to 1.7% in 2017. Elsewhere, the IMF projects that overall growth in emerging market countries will be 4.7% in 2018, the same as in 2017.
Looking back, at its meeting that concluded on September 20, 2017, the Federal Reserve Board (the “Fed”)iii kept the federal funds rateiv on hold, but reiterated its intention to begin reducing its balance sheet, saying, “In October, the Committee will initiate the balance sheet normalization program….” At its meeting that ended on December 13, 2017, the Fed raised rates to a range between 1.25% and 1.50%. As expected, the Fed kept rates on hold at its meeting that concluded on January 31, 2018. However, at its meeting that ended on March 21, 2018, the Fed again raised the federal funds rate, moving it to a range between 1.50% and 1.75%. At its meeting that concluded on June 13, 2018, the Fed raised the federal funds rate to a range between 1.75% and 2.00%. Finally, at its meeting that ended on September 26, 2018, the Fed raised the federal funds rate to a range between 2.00% and 2.25%.
Central banks outside the U.S. took different approaches to monetary policy during the reporting period. Looking back, in December 2016, the European Central Bank (“ECB”)v extended its bond buying program until December 2017. From April 2017 through December 2017, the ECB purchased €60
| Legg Mason International Low Volatility High Dividend ETF | III |
Investment commentary (cont’d)
billion-per-month of bonds. In October 2017, the ECB announced that it would continue to buy bonds through September 2018, but after December 2017 it would pare its purchases to €30 billion-per-month. In June 2018, the ECB announced it would end its bond buying program by the end of the year, but it did not anticipate raising interest rates “at least through the summer of 2019”. In other developed countries, on November 2, 2017, the Bank of Englandvi raised rates from 0.25% to 0.50% — the first increase since July 2007. It then raised rates to 0.75% at its meeting on August 2, 2018. After holding rates steady at 0.10% for more than five years, in January 2016, the Bank of Japanvii announced that it cut the rate on current accounts that commercial banks hold with it to -0.10% and kept rates on hold during the reporting period. Elsewhere, the People’s Bank of Chinaviii kept rates steady at 4.35% during the reporting period.
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
Jane Trust, CFA
President and Chief Executive Officer
November 30, 2018
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. Forecasts and predictions are inherently limited and should not be relied upon as an indication of actual or future performance.
| 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 International Monetary Fund (“IMF”) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. |
| 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. |
| iv | 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. |
| v | The European Central Bank (“ECB”) is responsible for the monetary system of the European Union and the euro currency. |
| vi | The Bank of England (“BoE”), formally the Governor and Company of the BoE, is the central bank of the United Kingdom. The BoE’s purpose is to maintain monetary and financial stability. |
| vii | The Bank of Japan is the central bank of Japan. The bank is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system and the yen currency. |
| viii | The People’s Bank of China is the central bank of the People’s Republic of China with the power to carry out monetary policy and regulate financial institutions in mainland China. |
| IV | Legg Mason International Low Volatility High Dividend ETF |
Q. What is the Fund’s investment strategy?
A. Legg Mason International Low Volatility High Dividend ETF (the “Fund”) seeks to track the investment results of the QS International Low Volatility High Dividend Hedged Index (the “Underlying Index”). The Underlying Index seeks to provide more stable income through investments in stocks of profitable companies in developed markets outside of the United States with relatively high dividend yields or anticipated dividend yields and lower price and earnings volatility, while mitigating exposure to exchange-rate fluctuations between the U.S. dollar and other international currencies. The Underlying Index is designed to have higher returns than an equivalent unhedged investment when the currencies in which its component securities are denominated are weakening relative to the U.S. dollar. Conversely, the Underlying Index is designed to have lower returns than an equivalent unhedged investment when the currencies in which its component securities are denominated are rising relative to the U.S. dollar.
The Underlying Index is based on a proprietary methodology created and sponsored by QS Investors, LLC (“QS Investors”), the Fund’s subadviser. The Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, if any, in securities that compose its Underlying Index. Securities that compose the Underlying Index include depositary receipts representing securities in the Underlying Index.
The Underlying Index is composed of equity securities in developed markets outside of the United States across a range of market capitalizations that are included in the MSCI World ex-US IMI Indexi. The Underlying Index’s components are reconstituted annually and rebalanced quarterly. The Fund’s securities portfolio is rebalanced when the Underlying Index is rebalanced or reconstituted. The composition of the Underlying Index and the Fund after reconstitution and rebalancing may fluctuate and exceed the 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 may invest up to 20% of its net assets in foreign currency forward contracts and other currency hedging instruments, 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 Investors believes will help the Fund track its Underlying Index.
The Fund invests in currency hedging instruments to offset the Fund’s exposure to the currencies in which the Fund’s holdings are denominated. The Fund may also invest in equity index futures and currency derivatives to gain exposure to local markets or segments of local markets for cash flow management purposes and as a portfolio management technique.
Q. What were the overall market conditions during the Fund’s reporting period?
A. After a prolonged period of steady upward momentum in global equity markets during 2017, volatility returned in 2018,
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 1 |
Fund overview (cont’d)
marked by two key episodes during the twelve-month reporting period ended October 31, 2018, the first in February 2018 and the second in October 2018.
For much of the reporting period, global equity returns were positive across most regions and sectors, although non-U.S. developed markets underperformed the U.S. which hit all-time highs in September 2018. In non-U.S. markets, growth slowed over the reporting period; a strong first quarter tapered off to more mixed results across regions and sectors for the remainder of the reporting period, even prior to the significant decline in October 2018.
International equities ended 2017 with double-digit gains. Most major equity markets posted positive returns in each quarter of 2017, in spite of geopolitical tensions in the Middle East and the Korean peninsula as well as rate hikes in the U.S. and the United Kingdom. This persistent trend of global equity growth ended early in the first quarter of 2018. Despite a backdrop of solid global economic gains, the market in early February 2018 dipped into correction territory. The sell-off was believed to be sparked by a report that inflation in the U.S. was rising higher than expected, leading to fear that the U.S. Federal Reserve Board (the “Fed”)ii would accelerate their rate tightening schedule. Aside from inflation, global manufacturing indicators weakened slightly off a nearly three-and-a-half year high in January 2018. Equities remained volatile through the end of the quarter amid talks of new tariffs and trade friction between the U.S. and China. For the first quarter of 2018, only emerging markets stayed positive among the major regions.
Many developed markets outside the U.S. and all emerging markets declined in U.S. dollar terms in the second quarter of 2018, as the U.S. dollar continued to strengthen and global trade tensions increased amid tariff implementation. Equity market performance continued to be driven by a narrow segment of stocks, as the rally in momentum/growth stocks continued.
In the third quarter of 2018, equity markets outside the U.S. were modestly positive overall, but mixed among major regions. In keeping with the general trend of 2018, developed markets outperformed emerging markets, which declined slightly. Large-cap indices outperformed small-caps and growth stocks continued to outperform value. While business optimism in the U.S. reached new highs in September 2018, it deteriorated in other regions on weakening economic expansion, higher costs for oil and other commodities, and trade tensions.
The final month of the reporting period proved to be a challenging month for investors, as volatility returned in earnest. Throughout the month, practically every asset class sold off to some extent, both in the U.S. and abroad. The narrow, growth-based names that had driven most of the gains for most of 2018 became expensive on most fundamental metrics. Investors reacted to this rising risk by pivoting towards value; value indices solidly outperformed growth indices for the month of October 2018. Most equity market regions and sectors had negative returns in U.S. dollar terms. In many markets, inflationary pressures, including commodity prices and interest rate hikes, were cited as causes for less optimistic views of business growth. Economic expansion weakened across a number of major markets as growth was impacted by
| 2 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
tense trade negotiations. Growth and solvency in emerging markets and concerns about the outcome of the U.S. mid-term elections were also deemed to be catalysts.
From a regional perspective, Japan was the best performing developed region outside the U.S. for the reporting period, and prior to October 2018 had positive returns in most sectors, a number in double digits. October 2018 brought the twelve months return into negative territory, with wide performance dispersion across sectors. While business sentiment declined in the final months of the reporting period on the high cost of the materials sector, the economy experienced moderate growth with a rising gross domestic product (“GDP”)iii. The Bank of Japan (“BoJ”)iv reported that inflation is on trend, and the BoJ will continue an accommodative stance.
The U.K. also had a positive return for the early part of the reporting period despite periods of difficulty around Brexit negotiations. However, the third calendar quarter of 2018 as well as the final month of the reporting period saw negative returns across most sectors despite an uptick in manufacturing and the rate of job creation, likely as a result of fears around rising inflation and Brexit. The Bank of Englandv left interest rates unchanged in September 2018 and noted that news about difficult Brexit negotiations was making private companies take cost-cutting measures and hold back on investments.
Continental Europe was the laggard among the major regions throughout much of the period. Widely mixed returns among European markets persisted. By the end of the period, most markets experienced somewhat reduced trade activity, growth slowdowns, and rising input costs as well as reduced output prices, sending business sentiment down on these and other worries, including trade protectionism and higher tariffs. In October 2018, exports declined for the first time in over five years.
Across the smaller regions, the resource-based Australia, New Zealand & Canada region and Asia Developed ex-Japan posted negative returns and underperformed the MSCI World ex-US IMI Index overall. Both were in positive territory until October 2018. Emerging markets declined as well, underperforming developed markets throughout much of the reporting period.
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 twelve months ended October 31, 2018, Legg Mason International Low Volatility High Dividend ETF generated a -1.49% return on a net asset value (“NAV”)vi basis and -2.06% based on its market pricevii per share.
The performance table shows the Fund’s total return for the twelve months ended October 31, 2018 based on its NAV and market price as of October 31, 2018. The Fund seeks to track the investment results of the QS International Low Volatility High Dividend Hedged Index, which returned -1.36% for the same period. The Fund’s broad-based market index, the MSCI World ex-US IMI Local Index (Net), returned -4.71% over the same time frame. The Lipper International Multi-Cap Value Funds
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 3 |
Fund overview (cont’d)
Category Average1 returned -9.86% for the same period. Please note that Lipper performance returns are based on each fund’s NAV.
| Performance Snapshot as of October 31, 2018 (unaudited) | ||||||||
| 6 months | 12 months | |||||||
| Legg Mason International Low Volatility High Dividend ETF: | ||||||||
$26.42 (NAV) | -2.00 | % | -1.49 | %*† | ||||
$26.27 (Market Price) | -1.63 | % | -2.06 | %*‡ | ||||
| QS International Low Volatility High Dividend Hedged Index | -1.90 | % | -1.36 | % | ||||
| MSCI World ex-US IMI Local Index (Net) | -5.54 | % | -4.71 | % | ||||
| Lipper International Multi-Cap Value Funds Category Average1 | -12.21 | % | -9.86 | % | ||||
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 redeemed or sold in the market, 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 direct purchase from or direct redemption to the ETF. Market price returns shown are typically based upon the mid-point between the bid and ask on the Fund’s principal trading market when the Fund’s NAV is determined, which is typically 4:00 p.m. Eastern time (US). 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 March 1, 2018, the gross total annual fund operating expense ratio for the Fund was 0.40%.
* 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.
Q. What were the leading contributors to performance?
A. Looking at the Underlying Index by country, the leading contributors to performance for the reporting period were France, Switzerland and Singapore. The leading contributor at the sector level was the Health Care sector, which had the highest total return in the Underlying Index. The Industrials and Materials sectors were also strong contributors to performance.
| 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, 2018, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 184 funds for the six-month period and among the 180 funds for the twelve-month period in the Fund’s Lipper category. |
| 4 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
Q. What were the leading detractors from performance?
A. The leading detractors from performance in the Underlying Index at the country level were the U.K., Germany and Australia, all with double digit negative returns. At the sector level, the Consumer Discretionary, Financials and Consumer Staples sectors were the leading detractors during the reporting period.
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 “LVHI” and its closing market price is available on most financial websites. In a continuing effort to provide information concerning the Fund, shareholders may call 1-877-721-1926 (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 International 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, 2018
RISKS: 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. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. Currency investing contains heightened risks that include market, political, regulatory, and national conditions, and may not be suitable for all investors. 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, 2018 were: Financials (19.2%), Communication Services (19.0%), Utilities (15.2%), Consumer Discretionary (12.9%) and Health Care (6.4%). 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
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 5 |
Fund overview (cont’d)
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.
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 | MSCI World ex-US IMI Index captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries — excluding the United States. The MSCI World ex-US IMI Local Index calculates performance utilizing local currencies taking out the effect of converting to the U.S. dollar. |
| 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 | The Bank of Japan (“BoJ”) is the central bank of Japan. The bank is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system and the yen currency. |
| v | The Bank of England (“BoE”), formally the Governor and Company of the BoE, is the central bank of the United Kingdom. The BoE’s purpose is to maintain monetary and financial stability. |
| vi | Net Asset Value (“NAV”) is calculated by subtracting total liabilities from total assets and dividing the result by the number of shares outstanding. |
| vii | 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. |
| 6 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of October 31, 2018 and October 31, 2017 and does not include derivatives such as futures contracts and forward foreign currency contracts. The composition of the Fund’s investments is subject to change at any time. |
| * | As of September 28, 2018, the Telecommunication Service sector was broadened to include some companies previously classified in the Consumer Discretionary and Information Technology sectors and renamed the Communication Services sector. |
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 7 |
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, 2018 and held for the six months ended October 31, 2018.
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 | |||||||||||||||||||||||||||||||||||||||||
| -2.00% | $ | 1,000.00 | $ | 980.00 | 0.40 | % | $ | 2.00 | 5.00 | % | $1,000.00 | $ | 1,023.19 | 0.40 | % | $ | 2.04 | |||||||||||||||||||||||||||||||||
| 1 | For the six months ended October 31, 2018. |
| 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 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 365. |
| 8 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
| Net Asset Value | ||||
| Average annual total returns1 | ||||
| Twelve Months Ended 10/31/18 | -1.49 | % | ||
| Inception* through 10/31/18 | 6.56 | |||
| Cumulative total returns1 | ||||
| Inception date of 7/27/16 through 10/31/18 | 15.47 | % | ||
| Market Price | ||||
| Average annual total returns2 | ||||
| Twelve Months Ended 10/31/18 | -2.06 | % | ||
| Inception* through 10/31/18 | 6.23 | |||
| Cumulative total returns2 | ||||
| Inception date of 7/27/16 through 10/31/18 | 14.65 | % | ||
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. 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.
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 direct purchase from or direct redemption to 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 typically based upon the mid-point between the bid and ask on the Fund’s principal trading market when the Fund’s NAV is determined, which is typically 4:00 p.m. Eastern Time (US). 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.
| 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 July 27, 2016. |
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 9 |
Fund performance (unaudited) (cont’d)
Historical performance
Value of $10,000 invested in
Legg Mason International Low Volatility High Dividend ETF vs. QS International Low Volatility High Dividend Hedged Index and MSCI World ex-US IMI Local Index (Net)† — July 27, 2016 - October 31, 2018
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. 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 International Low Volatility High Dividend ETF on July 27, 2016, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through October 31, 2018. The hypothetical illustration also assumes a $10,000 investment in the QS International Low Volatility High Dividend Hedged Index and MSCI World ex-US IMI Local Index (Net). 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. The QS International Low Volatility High Dividend Hedged Index (the “Underlying Index”) is an index composed of publicly traded equity securities of developed markets outside of the United States 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 MSCI World ex-US IMI Local Index (Net) captures large-, mid- and small-cap representation across 22 of 23 developed markets. The local version of the index calculates performance utilizing local currencies taking out the effect of converting to the U.S. dollar. 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. |
| 10 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
October 31, 2018
Legg Mason International Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
| Common Stocks — 96.8% | ||||||||||||||||
| Communication Services — 19.0% | ||||||||||||||||
Diversified Telecommunication Services — 14.4% | ||||||||||||||||
BCE Inc. | 26,046 | $ | 1,010,504 | |||||||||||||
Bezeq The Israeli Telecommunication Corp. Ltd. | 129,535 | 148,877 | ||||||||||||||
BT Group PLC | 425,449 | 1,307,671 | ||||||||||||||
Deutsche Telekom AG, Registered Shares | 22,872 | 375,640 | ||||||||||||||
Elisa OYJ | 6,891 | 274,446 | ||||||||||||||
HKT Trust & HKT Ltd. | 139,436 | 192,095 | ||||||||||||||
Proximus SADP | 11,809 | 301,723 | ||||||||||||||
Singapore Telecommunications Ltd. | 402,400 | 918,244 | ||||||||||||||
Swisscom AG, Registered Shares | 2,840 | 1,302,690 | ||||||||||||||
Telstra Corp. Ltd. | 305,522 | 666,939 | ||||||||||||||
TELUS Corp. | 16,475 | 565,538 | ||||||||||||||
Total Diversified Telecommunication Services | 7,064,367 | |||||||||||||||
Media — 1.4% | ||||||||||||||||
Eutelsat Communications SA | 12,975 | 263,301 | ||||||||||||||
Lagardere SCA | 9,257 | 253,720 | ||||||||||||||
RTL Group SA | 2,591 | 166,456 | ||||||||||||||
Total Media | 683,477 | |||||||||||||||
Wireless Telecommunication Services — 3.2% | ||||||||||||||||
Freenet AG | 10,822 | 243,888 | ||||||||||||||
NTT DOCOMO Inc. | 53,500 | 1,348,463 | ||||||||||||||
Total Wireless Telecommunication Services | 1,592,351 | |||||||||||||||
Total Communication Services | 9,340,195 | |||||||||||||||
| Consumer Discretionary — 12.7% | ||||||||||||||||
Auto Components — 0.5% | ||||||||||||||||
Bridgestone Corp. | 5,800 | 224,229 | ||||||||||||||
Automobiles — 9.4% | ||||||||||||||||
Bayerische Motoren Werke AG | 13,130 | 1,134,069 | ||||||||||||||
Daimler AG, Registered Shares | 19,481 | 1,155,739 | ||||||||||||||
Nissan Motor Co., Ltd. | 129,800 | 1,181,778 | ||||||||||||||
Toyota Motor Corp. | 19,700 | 1,154,716 | ||||||||||||||
Total Automobiles | 4,626,302 | |||||||||||||||
Household Durables — 2.2% | ||||||||||||||||
Barratt Developments PLC | 71,940 | 472,475 | ||||||||||||||
Persimmon PLC | 20,490 | 600,594 | ||||||||||||||
Total Household Durables | 1,073,069 | |||||||||||||||
See Notes to Financial Statements.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 11 |
Schedule of investments (cont’d)
October 31, 2018
Legg Mason International Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
Multiline Retail — 0.2% | ||||||||||||||||
Harvey Norman Holdings Ltd. | 37,167 | $ | 84,031 | |||||||||||||
Specialty Retail — 0.3% | ||||||||||||||||
Aoyama Trading Co., Ltd. | 2,600 | 78,791 | ||||||||||||||
Automotive Holdings Group Ltd. | 15,504 | 19,834 | ||||||||||||||
Giordano International Ltd. | 91,020 | 40,405 | ||||||||||||||
Mobilezone Holding AG, Registered Shares | 2,707 | 30,087 | ||||||||||||||
Total Specialty Retail | 169,117 | |||||||||||||||
Textiles, Apparel & Luxury Goods — 0.1% | ||||||||||||||||
Li & Fung Ltd. | 309,857 | 61,265 | ||||||||||||||
Total Consumer Discretionary | 6,238,013 | |||||||||||||||
| Consumer Staples — 4.4% | ||||||||||||||||
Food & Staples Retailing — 0.2% | ||||||||||||||||
Axfood AB | 6,591 | 117,726 | ||||||||||||||
Tobacco — 4.2% | ||||||||||||||||
British American Tobacco PLC | 19,972 | 865,995 | ||||||||||||||
Japan Tobacco Inc. | 46,500 | 1,197,574 | ||||||||||||||
Total Tobacco | 2,063,569 | |||||||||||||||
Total Consumer Staples | 2,181,295 | |||||||||||||||
| Energy — 5.7% | ||||||||||||||||
Energy Equipment & Services — 0.1% | ||||||||||||||||
Ocean Yield ASA | 6,427 | 48,938 | ||||||||||||||
Oil, Gas & Consumable Fuels — 5.6% | ||||||||||||||||
Enagas SA | 36,071 | 957,998 | ||||||||||||||
Gaztransport Et Technigaz SA | 1,047 | 77,584 | ||||||||||||||
Paz Oil Co. Ltd. | 241 | 36,064 | ||||||||||||||
Snam SpA | 116,039 | 480,421 | ||||||||||||||
Total SA | 20,282 | 1,194,067 | ||||||||||||||
Total Oil, Gas & Consumable Fuels | 2,746,134 | |||||||||||||||
Total Energy | 2,795,072 | |||||||||||||||
| Financials — 19.2% | ||||||||||||||||
Banks — 11.4% | ||||||||||||||||
Canadian Imperial Bank of Commerce | 14,596 | 1,263,486 | ||||||||||||||
Commonwealth Bank of Australia | 24,225 | 1,188,642 | ||||||||||||||
National Australia Bank Ltd. | 61,009 | 1,090,084 | ||||||||||||||
Nordea Bank Abp | 100,760 | 877,435 | ||||||||||||||
Swedbank AB, Class A Shares | 50,170 | 1,131,332 | ||||||||||||||
Westpac Banking Corp. | 1,414 | 26,908 | ||||||||||||||
Total Banks | 5,577,887 | |||||||||||||||
See Notes to Financial Statements.
| 12 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
Legg Mason International Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
Capital Markets — 0.4% | ||||||||||||||||
IGM Financial Inc. | 3,934 | $ | 96,849 | |||||||||||||
Jupiter Fund Management PLC | 22,719 | 97,828 | ||||||||||||||
Total Capital Markets | 194,677 | |||||||||||||||
Insurance — 7.4% | ||||||||||||||||
Baloise Holding AG, Registered Shares | 2,218 | 317,960 | ||||||||||||||
Legal & General Group PLC | 234,741 | 754,349 | ||||||||||||||
Poste Italiane SpA | 73,982 | 532,290 | ||||||||||||||
Power Financial Corp. | 8,166 | 176,285 | ||||||||||||||
Sampo Oyj, Class A Shares | 19,310 | 889,608 | ||||||||||||||
Zurich Insurance Group AG | 3,122 | 972,075 | ||||||||||||||
Total Insurance | 3,642,567 | |||||||||||||||
Total Financials | 9,415,131 | |||||||||||||||
| Health Care — 6.4% | ||||||||||||||||
Pharmaceuticals — 6.4% | ||||||||||||||||
Novartis AG, Registered Shares | 15,683 | 1,375,751 | ||||||||||||||
Roche Holding AG | 5,052 | 1,230,982 | ||||||||||||||
Sanofi | 5,884 | 525,616 | ||||||||||||||
Total Health Care | 3,132,349 | |||||||||||||||
| Industrials — 6.3% | ||||||||||||||||
Aerospace & Defense — 0.4% | ||||||||||||||||
Singapore Technologies Engineering Ltd. | 75,500 | 193,548 | ||||||||||||||
Air Freight & Logistics — 0.1% | ||||||||||||||||
Oesterreichische Post AG | 1,045 | 42,483 | ||||||||||||||
Airlines — 1.8% | ||||||||||||||||
Air New Zealand Ltd. | 19,712 | 36,041 | ||||||||||||||
Japan Airlines Co., Ltd. | 24,200 | 861,383 | ||||||||||||||
Total Airlines | 897,424 | |||||||||||||||
Construction & Engineering — 0.6% | ||||||||||||||||
Skanska AB, Class B Shares | 19,536 | 307,905 | ||||||||||||||
Industrial Conglomerates — 0.2% | ||||||||||||||||
NWS Holdings Ltd. | 31,954 | 63,261 | ||||||||||||||
Marine — 1.0% | ||||||||||||||||
Kuehne + Nagel International AG, Registered Shares | 3,607 | 502,377 | ||||||||||||||
Road & Rail — 0.5% | ||||||||||||||||
ComfortDelGro Corp. Ltd. | 158,600 | 257,691 | ||||||||||||||
Trading Companies & Distributors — 1.7% | ||||||||||||||||
Marubeni Corp. | 103,900 | 843,592 | ||||||||||||||
Total Industrials | 3,108,281 | |||||||||||||||
See Notes to Financial Statements.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 13 |
Schedule of investments (cont’d)
October 31, 2018
Legg Mason International Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
| Information Technology — 0.4% | ||||||||||||||||
Communications Equipment — 0.1% | ||||||||||||||||
VTech Holdings Ltd. | 5,132 | $ | 60,227 | |||||||||||||
IT Services — 0.1% | ||||||||||||||||
Tieto OYJ | 1,757 | 56,657 | ||||||||||||||
Technology Hardware, Storage & Peripherals — 0.2% | ||||||||||||||||
Neopost SA | 2,058 | 66,224 | ||||||||||||||
Total Information Technology | 183,108 | |||||||||||||||
| Materials — 1.5% | ||||||||||||||||
Construction Materials — 0.1% | ||||||||||||||||
CSR Ltd. | 28,336 | 70,893 | ||||||||||||||
Paper & Forest Products — 1.4% | ||||||||||||||||
Navigator Co. SA | 8,186 | 40,811 | ||||||||||||||
UPM-Kymmene OYJ | 20,294 | 653,262 | ||||||||||||||
Total Paper & Forest Products | 694,073 | |||||||||||||||
Total Materials | 764,966 | |||||||||||||||
| Real Estate — 6.0% | ||||||||||||||||
Equity Real Estate Investment Trusts (REITs) — 5.6% | ||||||||||||||||
Artis Real Estate Investment Trust | 3,932 | 33,534 | ||||||||||||||
Ascendas Real Estate Investment Trust | 144,800 | 263,501 | ||||||||||||||
Befimmo SA | 536 | 29,424 | ||||||||||||||
CapitaLand Commercial Trust | 184,820 | 230,892 | ||||||||||||||
CapitaLand Mall Trust | 216,300 | 329,573 | ||||||||||||||
Charter Hall Retail REIT | 16,547 | 49,843 | ||||||||||||||
Cromwell Property Group | 53,861 | 39,319 | ||||||||||||||
Daiwa House REIT Investment Corp. | 35 | 76,603 | ||||||||||||||
Dream Global Real Estate Investment Trust | 5,630 | 57,532 | ||||||||||||||
Frasers Commercial Trust | 30,800 | 30,471 | ||||||||||||||
Frontier Real Estate Investment Corp. | 16 | 61,318 | ||||||||||||||
H&R Real Estate Investment Trust | 9,335 | 141,527 | ||||||||||||||
Hankyu Reit Inc. | 34 | 42,298 | ||||||||||||||
Heiwa Real Estate REIT Inc. | 27 | 26,484 | ||||||||||||||
Invesco Office J-Reit Inc. | 334 | 47,205 | ||||||||||||||
Japan Excellent Inc. | 36 | 46,701 | ||||||||||||||
Japan Logistics Fund Inc. | 45 | 89,797 | ||||||||||||||
Japan Rental Housing Investments Inc. | 46 | 36,073 | ||||||||||||||
Kenedix Retail REIT Corp. | 28 | 59,545 | ||||||||||||||
Keppel DC REIT | 39,148 | 37,599 | ||||||||||||||
Keppel REIT | 81,900 | 66,831 | ||||||||||||||
See Notes to Financial Statements.
| 14 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
Legg Mason International Low Volatility High Dividend ETF
| Security | Shares | Value | ||||||||||||||
Equity Real Estate Investment Trusts (REITs) — continued | ||||||||||||||||
Mapletree Commercial Trust | 89,200 | $ | 103,706 | |||||||||||||
Mapletree Industrial Trust | 78,400 | 104,737 | ||||||||||||||
Mapletree Logistics Trust | 145,500 | 127,134 | ||||||||||||||
Mapletree North Asia Commercial Trust | 58,500 | 47,736 | ||||||||||||||
Mercialys SA | 1,806 | 26,499 | ||||||||||||||
Mori Hills REIT Investment Corp., Class C Shares | 55 | 68,034 | ||||||||||||||
NIPPON REIT Investment Corp. | 15 | 48,779 | ||||||||||||||
RioCan Real Estate Investment Trust | 12,268 | 224,201 | ||||||||||||||
SmartCentres Real Estate Investment Trust | 3,763 | 86,192 | ||||||||||||||
Suntec Real Estate Investment Trust | 89,200 | 114,012 | ||||||||||||||
Total Equity Real Estate Investment Trusts (REITs) | 2,747,100 | |||||||||||||||
Real Estate Management & Development — 0.4% | ||||||||||||||||
Swiss Prime Site AG, Registered Shares | 2,661 | 216,393 | * | |||||||||||||
Total Real Estate | 2,963,493 | |||||||||||||||
| Utilities — 15.2% | ||||||||||||||||
Electric Utilities — 10.7% | ||||||||||||||||
CLP Holdings Ltd. | 33,406 | 374,568 | ||||||||||||||
EDP — Energias de Portugal SA | 98,522 | 346,501 | ||||||||||||||
Endesa SA | 49,206 | 1,030,312 | ||||||||||||||
Iberdrola SA | 167,464 | 1,187,045 | ||||||||||||||
Red Electrica Corp. SA | 40,841 | 846,830 | ||||||||||||||
SSE PLC | 62,401 | 910,150 | ||||||||||||||
Terna Rete Elettrica Nazionale SpA | 110,855 | 573,383 | ||||||||||||||
Total Electric Utilities | 5,268,789 | |||||||||||||||
Multi-Utilities — 2.5% | ||||||||||||||||
National Grid PLC | 108,622 | 1,150,861 | ||||||||||||||
REN — Redes Energeticas Nacionais SGPS SA | 22,376 | 59,681 | ||||||||||||||
Total Multi-Utilities | 1,210,542 | |||||||||||||||
Water Utilities — 2.0% | ||||||||||||||||
Pennon Group PLC | 26,703 | 254,602 | ||||||||||||||
Severn Trent PLC | 12,804 | 304,792 | ||||||||||||||
United Utilities Group PLC | 45,222 | 419,847 | ||||||||||||||
Total Water Utilities | 979,241 | |||||||||||||||
Total Utilities | 7,458,572 | |||||||||||||||
Total Common Stocks (Cost — $52,238,406) | 47,580,475 | |||||||||||||||
See Notes to Financial Statements.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 15 |
Schedule of investments (cont’d)
October 31, 2018
Legg Mason International Low Volatility High Dividend ETF
| Security | Rate | Shares | Value | |||||||||||||
| Preferred Stocks — 0.2% | ||||||||||||||||
| Consumer Discretionary — 0.2% | ||||||||||||||||
Automobiles — 0.2% | ||||||||||||||||
Bayerische Motoren Werke AG (Cost — $106,198) | — | 1,264 | $ | 95,526 | ||||||||||||
Total Investments before Short-Term Investments (Cost — $52,344,604) |
| 47,676,001 | ||||||||||||||
| Short-Term Investments — 0.9% | ||||||||||||||||
Invesco Treasury Portfolio, Institutional Class (Cost — $438,124) | 2.064% | 438,124 | 438,124 | |||||||||||||
Total Investments — 97.9% (Cost — $52,782,728) | 48,114,125 | |||||||||||||||
Other Assets in Excess of Liabilities — 2.1% | 1,029,813 | |||||||||||||||
Total Net Assets — 100.0% | $ | 49,143,938 | ||||||||||||||
| * | Non-income producing security. |
Abbreviation used in this schedule: | ||
| REIT | — Real Estate Investment Trust | |
At October 31, 2018, the Fund had the following open futures contracts:
| Number of Contracts | Expiration Date | Notional Amount | Market Value | Unrealized Depreciation | ||||||||||||||||
| Contracts to Buy: | ||||||||||||||||||||
| MSCI EAFE Index Futures | 6 | 12/18 | $ | 583,726 | $ | 543,750 | $ | (39,976) | ||||||||||||
At October 31, 2018, the Fund had the following open forward foreign currency contracts:
| Currency Purchased | Currency Sold | Counterparty | Settlement Date | Unrealized Appreciation (Depreciation) | ||||||||||||||||
| USD | 6,048,816 | CHF | 5,976,103 | Bank of New York | 11/13/18 | $ | 100,811 | |||||||||||||
| USD | 14,905,544 | EUR | 12,903,211 | Bank of New York | 11/13/18 | 270,407 | ||||||||||||||
| USD | 198,451 | ILS | 719,671 | Bank of New York | 11/13/18 | 4,902 | ||||||||||||||
| USD | 7,830,578 | JPY | 888,175,548 | Bank of New York | 11/13/18 | (46,937) | ||||||||||||||
| USD | 3,441,216 | AUD | 4,852,435 | UBS AG | 11/13/18 | 1,548 | ||||||||||||||
| USD | 3,928,941 | CAD | 5,054,964 | UBS AG | 11/13/18 | 78,850 | ||||||||||||||
| USD | 7,357,792 | GBP | 5,638,799 | UBS AG | 11/13/18 | 148,685 | ||||||||||||||
| USD | 829,594 | HKD | 6,495,969 | UBS AG | 11/13/18 | 564 | ||||||||||||||
| USD | 2,724,164 | SEK | 24,565,165 | UBS AG | 11/13/18 | 33,541 | ||||||||||||||
| USD | 2,990,663 | SGD | 4,122,844 | UBS AG | 11/13/18 | 12,583 | ||||||||||||||
| Total | $ | 604,954 | ||||||||||||||||||
See Notes to Financial Statements.
| 16 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
Legg Mason International Low Volatility High Dividend ETF
Abbreviations used in this table: | ||
| AUD | — Australian Dollar | |
| CAD | — Canadian Dollar | |
| CHF | — Swiss Franc | |
| EUR | — Euro | |
| GBP | — British Pound | |
| HKD | — Hong Kong Dollar | |
| ILS | — Israeli Shekel | |
| JPY | — Japanese Yen | |
| SEK | — Swedish Krona | |
| SGD | — Singapore Dollar | |
| USD | — United States Dollar | |
| Summary of Investments by Country* (unaudited) | ||||
| Japan | 15.6 | % | ||
| United Kingdom | 14.8 | |||
| Switzerland | 12.4 | |||
| Spain | 8.4 | |||
| Canada | 7.6 | |||
| Australia | 6.7 | |||
| Germany | 6.2 | |||
| Singapore | 5.9 | |||
| Finland | 5.7 | |||
| France | 5.0 | |||
| Italy | 3.3 | |||
| Sweden | 3.2 | |||
| Hong Kong | 1.6 | |||
| Portugal | 0.9 | |||
| Belgium | 0.7 | |||
| Israel | 0.4 | |||
| Luxembourg | 0.4 | |||
| Norway | 0.1 | |||
| Austria | 0.1 | |||
| New Zealand | 0.1 | |||
| Short-Term Investments | 0.9 | |||
| 100.0 | % | |||
| * | As a percentage of total investments. Please note that the Fund holdings are as of October 31, 2018 and are subject to change. |
See Notes to Financial Statements.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 17 |
Statement of assets and liabilities
October 31, 2018
| Assets: | ||||
Investments, at value (Cost — $52,782,728) | $ | 48,114,125 | ||
Foreign currency, at value (Cost — $148,382) | 147,455 | |||
Unrealized appreciation on forward foreign currency contracts | 651,891 | |||
Dividends and interest receivable | 254,978 | |||
Deposits with brokers for open futures contracts | 79,170 | |||
Total Assets | 49,247,619 | |||
| Liabilities: | ||||
Unrealized depreciation on forward foreign currency contracts | 46,937 | |||
Payable to broker—variation margin on open futures contracts | 40,011 | |||
Investment management fee payable | 16,733 | |||
Total Liabilities | 103,681 | |||
| Total Net Assets | $ | 49,143,938 | ||
| Net Assets: | ||||
Par value (Note 5) | $ | 19 | ||
Paid-in capital in excess of par value | 51,691,937 | |||
Undistributed net investment income | 179,828 | |||
Accumulated net realized gain on investments, futures contracts, forward foreign currency contracts and foreign currency transactions | 1,381,595 | |||
Net unrealized depreciation on investments, futures contracts, forward foreign currency contracts and foreign currencies | (4,109,441) | |||
| Total Net Assets | $ | 49,143,938 | ||
| Shares Outstanding | 1,860,000 | |||
| Net Asset Value | $26.42 | |||
See Notes to Financial Statements.
| 18 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
For the Year Ended October 31, 2018
| Investment Income: | ||||
Dividends | $ | 2,912,941 | ||
Interest | 4,996 | |||
Less: Foreign taxes withheld | (262,422) | |||
Total Investment Income | 2,655,515 | |||
| Expenses: | ||||
Investment management fee (Note 2) | 218,537 | |||
Total Expenses | 218,537 | |||
| Net Investment Income | 2,436,978 | |||
| Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions (Notes 1, 3 and 4): | ||||
Net Realized Gain (Loss) From: | ||||
Investment transactions | 1,974,469 | |||
Futures contracts | (22,369) | |||
Forward foreign currency contracts | 2,177,374 | |||
Foreign currency transactions | (184,036) | |||
Net Realized Gain | 3,945,438 | |||
Change in Net Unrealized Appreciation (Depreciation) From: | ||||
Investments | (7,184,375) | |||
Futures contracts | (43,101) | |||
Forward foreign currency contracts | (13,218) | |||
Foreign currencies | (5,074) | |||
Change in Net Unrealized Appreciation (Depreciation) | (7,245,768) | |||
| Net Loss on Investments, Futures Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions | (3,300,330) | |||
| Decrease in Net Assets From Operations | $ | (863,352) | ||
See Notes to Financial Statements.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 19 |
Statements of changes in net assets
| For the Years Ended October 31, | 2018 | 2017 | ||||||
| Operations: | ||||||||
Net investment income | $ | 2,436,978 | $ | 772,521 | ||||
Net realized gain (loss) | 3,945,438 | (1,061,001) | ||||||
Change in net unrealized appreciation (depreciation) | (7,245,768) | 3,134,402 | ||||||
Increase (Decrease) in Net Assets From Operations | (863,352) | 2,845,922 | ||||||
| Distributions to Shareholders From (Note 1): | ||||||||
Net investment income | (2,641,548) | (727,001) | ||||||
Net realized gains | — | (53,653) | ||||||
Decrease in Net Assets From Distributions to Shareholders | (2,641,548) | (780,654) | ||||||
| Fund Share Transactions (Note 5): | ||||||||
Net proceeds from sale of shares (60,000 and 2,040,000 shares issued, respectively) | 1,705,829 | 55,802,966 | ||||||
Cost of shares repurchased (360,000 and 0 shares repurchased, respectively) | (9,955,198) | — | ||||||
Increase (Decrease) in Net Assets From Fund Share Transactions | (8,249,369) | 55,802,966 | ||||||
Increase (Decrease) in Net Assets | (11,754,269) | 57,868,234 | ||||||
| Net Assets: | ||||||||
Beginning of year | 60,898,207 | 3,029,973 | ||||||
End of year* | $ | 49,143,938 | $ | 60,898,207 | ||||
*Includes undistributed net investment income, of: | $179,829 | $97,591 | ||||||
See Notes to Financial Statements.
| 20 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
| For a share of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted: | ||||||||||||
| 20181 | 20171 | 20161,2 | ||||||||||
| Net asset value, beginning of year | $28.19 | $25.25 | $25.18 | |||||||||
| Income (loss) from operations: | ||||||||||||
Net investment income | 1.22 | 0.85 | 0.17 | |||||||||
Net realized and unrealized gain (loss) | (1.65) | 3.21 | 0.02 | |||||||||
Total income (loss) from operations | (0.43) | 4.06 | 0.19 | |||||||||
| Less distributions from: | ||||||||||||
Net investment income | (1.34) | (0.90) | (0.12) | |||||||||
Net realized gains | — | (0.22) | — | |||||||||
Total distributions | (1.34) | (1.12) | (0.12) | |||||||||
| Net asset value, end of year | $26.42 | $28.19 | $25.25 | |||||||||
Total return, based on NAV3 | (1.49) | % | 16.35 | % | 0.75 | % | ||||||
| Net assets, end of year (000s) | $49,144 | $60,898 | $3,030 | |||||||||
| Ratios to average net assets: | ||||||||||||
Gross expenses | 0.40 | % | 0.40 | % | 0.40 | %4 | ||||||
Net expenses | 0.40 | 0.40 | 0.40 | 4 | ||||||||
Net investment income | 4.46 | 3.13 | 2.57 | 4 | ||||||||
| Portfolio turnover rate5 | 41 | % | 31 | % | 18 | % | ||||||
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the period July 27, 2016 (inception date) to October 31, 2016. |
| 3 | 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. |
| 4 | Annualized. |
| 5 | 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 International Low Volatility High Dividend ETF 2018 Annual Report | 21 |
1. Organization and significant accounting policies
Legg Mason International Low Volatility High Dividend ETF (the “Fund”) is a separate diversified investment series of Legg Mason ETF Investment 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 Cboe BZX Exchange, Inc. 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 International Low Volatility High Dividend Hedged Index (the “Underlying Index”). The Underlying Index seeks to provide more stable income through investments in stocks of profitable companies in developed markets outside of the United States with relatively high dividend yields or anticipated dividend yields and lower price and earnings volatility, while mitigating exposure to exchange-rate fluctuations between the U.S. dollar and other international currencies and 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
| 22 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
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 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. Prior to December 1, 2017, short-term fixed income securities that would mature in 60 days or less were valued at amortized cost, unless it was 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 use the currency exchange rates, generally determined as of 4:00 p.m. (London Time) (4:00 p.m. Eastern Time prior to October 1, 2018). 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
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 23 |
Notes to financial statements (cont’d)
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 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 | ||||||||||||
| Long-term investments†: | ||||||||||||||||
Common stocks | $ | 47,580,475 | $ | 47,580,475 | ||||||||||||
Preferred stocks | 95,526 | — | — | 95,526 | ||||||||||||
| Total long-term investments | 47,676,001 | — | — | 47,676,001 | ||||||||||||
| Short-term investments† | 438,124 | — | — | 438,124 | ||||||||||||
| Total investments | $ | 48,114,125 | — | — | $ | 48,114,125 | ||||||||||
| Other financial instruments: | ||||||||||||||||
Forward foreign currency contracts | — | $ | 651,891 | — | $ | 651,891 | ||||||||||
| Total | $ | 48,114,125 | $ | 651,981 | — | $ | 48,766,016 | |||||||||
| 24 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
| LIABILITIES | ||||||||||||||||
| Description | Quoted Prices (Level 1) | Other Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Other financial instruments: | ||||||||||||||||
Futures contracts | $ | 39,976 | — | — | $ | 39,976 | ||||||||||
Forward foreign currency contracts | — | $ | 46,937 | — | 46,937 | |||||||||||
| Total | $ | 39,976 | $ | 46,937 | — | $ | 86,913 | |||||||||
| † | See Schedule of Investments for additional detailed categorizations. |
(b) Futures contracts. The Fund uses futures contracts generally to gain or manage exposure to certain asset classes, sectors, or markets or for cash management purposes. 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) Forward foreign currency contracts. The Fund enters into a forward foreign currency contract to hedge exposure of bond positions or in an attempt to increase the Fund’s return. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
(d) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 25 |
Notes to financial statements (cont’d)
prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(e) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(f) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
| 26 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement, with certain of its derivative counterparties that govern over-the-counter derivatives and provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of October 31, 2018, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $46,937. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties.
(g) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 27 |
Notes to financial statements (cont’d)
diligence. 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.
(h) 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.
(i) 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.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of October 31, 2018, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(j) 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:
| Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid in Capital | ||||||||||
| (a) | $ | 44,132 | $ | (1,161,482) | $ | 1,117,350 | ||||||
| (b) | 242,675 | (242,675) | — | |||||||||
| (a) | Reclassifications are due to book/tax differences in the treatment of an in-kind distribution of securities. |
| (b) | Reclassifications are due to foreign currency transactions treated as ordinary income for tax purposes and book/tax differences in the treatment of passive foreign investment companies. |
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 Investors”) is the Fund’s subadviser. Western Asset Management Company, LLC (formerly Western Asset Management Company) (“Western Asset”) manages the portion of the Fund’s cash and short-term instruments allocated to it. LMPFA, QS Investors and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
| 28 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
LMPFA provides administrative and certain oversight services to the Fund. 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.
Under the investment management agreement and subject to the general supervision of the Fund’s Board of Trustees, LMPFA provides or causes to be furnished all investment management, supervisory, administrative and other services reasonably necessary for the operation of the Fund, including certain distribution services (provided pursuant to a separate distribution agreement) and investment advisory services (provided pursuant to separate subadvisory agreements) under a unitary fee structure. The Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.40% of the Fund’s average daily net assets.
As compensation for its subadvisory services, LMPFA pays QS Investors monthly 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 monthly 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.
3. Investments
During the year ended October 31, 2018, the aggregate cost of purchases and proceeds from sales of investments (excluding in-kind transactions and short-term investments) were as follows:
| Purchases | $ | 23,482,839 | ||
| Sales | 22,255,618 |
During the year ended October 31, 2018, in-kind transactions (Note 5) were as follows:
| Contributions | $ | 1,683,045 | ||
| Redemptions | 9,892,697 | |||
| Realized gain (loss)* | 1,196,163 |
| * | Net realized gains on redemptions in-kind are not taxable to the remaining shareholders of the Fund. |
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 29 |
Notes to financial statements (cont’d)
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, 2018, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| Cost | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | |||||||||||||
| Securities | $ | 53,042,015 | $ | 553,481 | $ | (5,481,371) | $ | (4,927,890) | ||||||||
| Futures contracts | — | — | (39,976) | (39,976) | ||||||||||||
| Forward foreign currency contracts | — | 651,891 | (46,937) | 604,954 | ||||||||||||
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, 2018.
| ASSET DERIVATIVES1 | ||||||||||||
| Foreign Exchange Risk | ||||||||||||
| Forward foreign currency contracts | $ | 651,891 | ||||||||||
| LIABILITY DERIVATIVES1 | ||||||||||||
| Foreign Exchange Risk | Equity Risk | Total | ||||||||||
| Futures contracts2 | — | $ | 39,976 | $ | 39,976 | |||||||
| Forward foreign currency contracts | $ | 46,937 | — | 46,937 | ||||||||
| Total | $ | 46,937 | $ | 39,976 | $ | 86,913 | ||||||
| 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 Schedule of Investments. Only variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities. |
The following table provides information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the year ended October 31, 2018. The 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 | ||||||||||||
| Foreign Exchange Risk | Equity Risk | Total | ||||||||||
| Futures contracts | — | $ | (22,369) | $ | (22,369) | |||||||
| Forward foreign currency contracts | $ | 2,177,374 | — | 2,177,374 | ||||||||
| Total | $ | 2,177,374 | $ | (22,369) | $ | 2,155,005 | ||||||
| 30 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
| CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED | ||||||||||||
| Foreign Exchange Risk | Equity Risk | Total | ||||||||||
| Futures contracts | — | $ | (43,101) | $ | (43,101) | |||||||
| Forward foreign currency contracts | $ | (13,218) | — | (13,218) | ||||||||
| Total | $ | (13,218) | $ | (43,101) | $ | (56,319) | ||||||
During the year ended October 31, 2018, the volume of derivative activity for the Fund was as follows:
| Average Market Value | ||||
| Futures contracts (to buy) | $ | 335,309 | ||
| Forward foreign currency contracts (to buy) | 704,335 | |||
| Forward foreign currency contracts (to sell) | 55,016,894 | |||
The following table presents the Fund’s OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master Agreement and net of the related collateral pledged (received) by the Fund as of October 31, 2018.
| Counterparty | Gross Assets Subject to Master Agreements1 | Gross Liabilities Subject to Master Agreements1 | Net Assets (Liabilities) Subject to Master Agreements | Collateral Pledged (Received) | Net Amount2 | |||||||||||||||
| Bank of New York | $ | 376,120 | $ | (46,937) | $ | 329,183 | — | $ | 329,183 | |||||||||||
| UBS AG | 275,771 | — | 275,771 | — | 275,771 | |||||||||||||||
| Total | $ | 651,891 | $ | (46,937) | $ | 604,954 | — | $ | 604,954 | |||||||||||
| 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 | Represents the net amount receivable (payable) from (to) the counterparty in the event of default. |
5. Fund share transactions
At October 31, 2018, 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 60,000 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 Creation Units. Creations and redemptions for cash (when cash creations and redemptions are available or specified) may be subject to an additional variable fee.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 31 |
Notes to financial statements (cont’d)
6. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended October 31, was as follows:
| 2018 | 2017 | |||||||
| Distributions paid from: | ||||||||
| Ordinary income | $ | 2,641,548 | $ | 754,862 | ||||
| Net long-term capital gains | — | 25,792 | ||||||
| Total distributions paid | $ | 2,641,548 | $ | 780,654 | ||||
As of October 31, 2018, the components of accumulated earnings (losses) on a tax basis were as follows:
| Undistributed ordinary income — net | $ | 1,620,892 | ||
| Undistributed long-term capital gains — net | 751,646 | |||
| Total undistributed earnings | 2,372,538 | |||
| Other book/tax temporary differences(a) | (551,828) | |||
| Unrealized appreciation (depreciation)(b) | (4,368,728) | |||
| Total accumulated earnings (losses) — net | $ | (2,548,018) |
| (a) | Other book/tax temporary differences are attributable to the realization for tax purposes of unrealized gain (losses) on certain futures and foreign currency contracts. |
| (b) | The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on investments in foreign passive investment companies. |
| 32 | Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report |
Report of independent registered public
accounting firm
To the Board of Trustees of Legg Mason ETF Investment Trust and Shareholders of Legg Mason International Low Volatility High Dividend ETF
Opinion on the financial statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason International Low Volatility High Dividend ETF (one of the funds constituting Legg Mason ETF Investment Trust, referred to hereafter as the “Fund”) as of October 31, 2018, the related statement of operations for the year ended October 31, 2018 and the statement of changes in net assets and financial highlights for each of the two years in the period ended October 31, 2018, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of October 31, 2018, the results of its operations for the year then ended, and the changes in its net assets and financial highlights for each of the two years in the period ended October 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements and financial highlights of the Fund as of October 31, 2016 and for the period July 27, 2016 (inception) through October 31, 2016 (not presented herein, other than the financial highlights) were audited by other auditors whose report dated December 21, 2016 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of October 31, 2018 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
December 19, 2018
We have served as the auditor of one or more investment companies in Legg Mason investment company group since at least 1973. We have not determined the specific year we began serving as auditor.
| Legg Mason International Low Volatility High Dividend ETF 2018 Annual Report | 33 |
Additional information (unaudited)
Information about Trustees and Officers
The business and affairs of Legg Mason International 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 1-877-721-1926.
| 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 | 48 | |
| 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 | 48 | |
| 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 | 48 | |
| Other board memberships held by Trustee during past five years | None | |
| 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 | 48 | |
| Other board memberships held by Trustee during past five years | None | |
| 34 | Legg Mason International Low Volatility High Dividend ETF |
| Independent Trustees† cont’d | ||
| 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 | 48 | |
| 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 | 48 | |
| 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 | 48 | |
| Other board memberships held by Trustee during past five years | None | |
| 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 | 48 | |
| Other board memberships held by Trustee during past five years | None | |
| Legg Mason International Low Volatility High Dividend ETF | 35 |
Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| Independent Trustees† cont’d | ||
| 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 | President (since 2017) and formerly, Founder and Senior Principal (1983 to 2017), Murphy Capital Management (investment management); and Senior Vice President, Peapack-Gladstone Bank (commercial bank) (since 2017) | |
| Number of funds in fund complex overseen by Trustee | 48 | |
| Other board memberships held by Trustee during past five years | Trustee, UBS Funds (24 funds) (since 2008); Trustee, Consulting Group Capital Markets Funds (11 funds) (since 2002); Director, Fort Dearborn Income Securities, Inc. (2013 to 2016) | |
| 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); Senior Counsel (since 2017) and formerly, Partner (2009 to 2016), Thompson Coburn LLP (law firm) | |
| Number of funds in fund complex overseen by Trustee | 48 | |
| Other board memberships held by Trustee during past five years | Director, Citizens National Bank of Greater St. Louis (since 2006) | |
| Interested Trustee and Officer | ||
| Jane Trust, CFA3 | ||
| 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 | Senior Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2018); Managing Director of Legg Mason & Co. (2016 to 2018); Officer and/or Trustee/ Director of 147 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 | 138 | |
| Other board memberships held by Trustee during past five years | None | |
| 36 | Legg Mason International Low Volatility High Dividend ETF |
| 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 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| 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) | |
Jenna Bailey Legg Mason 100 First Stamford Place, 5th Floor, Stamford, CT 06902 | ||
| 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) | |
| Legg Mason International Low Volatility High Dividend ETF | 37 |
Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| Additional Officers cont’d | ||
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) | |
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) | |
| 38 | Legg Mason International Low Volatility High Dividend ETF |
| Additional Officers cont’d | ||
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 Funds, as defined in the 1940 Act, because of her position with LMPFA and/or certain of its affiliates. |
| Legg Mason International Low Volatility High Dividend ETF | 39 |
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended October 31, 2018:
| Record date: | 12/27/2017 | 3/27/2018 | 6/27/2018 | 9/26/2018 | ||||||||||||
| Payable date: | 12/29/2017 | 3/29/2018 | 6/29/2018 | 9/28/2018 | ||||||||||||
| Ordinary income: | ||||||||||||||||
Qualified dividend income for individuals | 92.67 | %* | 57.37 | %* | 57.37 | %* | 57.37 | %* | ||||||||
| Foreign source income | 86.11 | %* | 66.68 | %* | 66.68 | %* | 66.68 | %* | ||||||||
| Foreign taxes paid per share | $0.007871 | $0.018470 | $0.026177 | $0.016286 |
| * | Expressed as a percentage of the cash distribution grossed-up for foreign taxes. |
The foreign taxes paid represent taxes incurred by the Fund on income received by the Fund from foreign sources. Foreign taxes paid may be included in taxable income with an offsetting deduction from gross income or may be taken as a credit for taxes paid to foreign governments. You should consult your tax adviser regarding the appropriate treatment of foreign taxes paid.
Please retain this information for your records.
| 40 | Legg Mason International Low Volatility High Dividend ETF |
Legg Mason
International 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
The Bank of New York Mellon (“BNY”)*
| * | Effective July 16, 2018, BNY became custodian and BNY Mellon became transfer agent. |
Transfer agent
BNY Mellon Investment Servicing (US) Inc. (“BNY Mellon”)*
4400 Computer Drive
Westborough, MA 01581
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legg Mason International Low Volatility High Dividend ETF
The Fund is a separate investment series of Legg Mason ETF Investment Trust, a Maryland statutory trust.
Legg Mason International 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. To obtain information on Form N-Q, shareholders can call the Fund at 1-877-721-1926.
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 1-877-721-1926, (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 International 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
© 2018 Legg Mason Investors Services, LLC
Member FINRA, SIPC
ETF Index Disclaimers
The MSCI World ex-US IMI Index (the “MSCI Index”) was used by QS Investors, LLC (“QS Investors”), the Fund’s subadviser, as the reference universe for selection of the component securities included in the QS International Low Volatility High Dividend Hedged Index (the “Underlying Index”). MSCI Inc. does not in any way sponsor, support, promote or endorse the Underlying Index or Legg Mason International Low Volatility High Dividend ETF (the “Fund”). MSCI Inc. was not and is not involved in any way in the creation, calculation, maintenance or review of the Underlying Index. The MSCI Index was provided on an “as is” basis. MSCI Inc., its affiliates and any other person or entity involved in or related to compiling, computing or creating the MSCI Index (collectively, the “MSCI Parties”) expressly disclaim all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, noninfringement, merchantability and fitness for a particular purpose). Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including without limitation lost profits) or any other damages in connection with the MSCI Index, the Underlying Index or the Fund.
The Fund is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Underlying Index and/or Underlying Index trade mark or the Underlying Index Price at any time or in any other respect. The Underlying Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Underlying Index is calculated correctly. Irrespective of its obligations towards the Fund, Solactive AG has no obligation to point out errors in the Underlying Index to third parties including but not limited to investors and/or financial intermediaries of the Fund. Neither publication of the Underlying Index by Solactive AG nor the licensing of the Underlying Index or the Underlying Index trade mark for the purpose of use in connection with the Fund constitutes a recommendation by Solactive AG to invest capital in this Fund nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this Fund.
QS Investors does not guarantee the accuracy and/or the completeness of the Underlying Index or any data included therein, and QS Investors shall not have any liability for any errors, omissions or interruptions therein. QS Investors 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 Underlying Index, or any data included therein, either in connection with the Fund or for any other use. QS Investors 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 Underlying Index or any data included therein. Without limiting any of the foregoing, in no event shall QS Investors 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 Underlying Index, even if notified of the possibility of such damages.
www.leggmason.com
© 2018 Legg Mason Investor Services, LLC Member FINRA, SIPC
ETFF323385 12/18 SR18-3504
| 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, possess the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as “audit committee financial experts,” and have designated Dwight B. Crane as the Audit Committee’s financial experts. 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 last fiscal period ending October 31, 2017 and October 31, 2018 (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 $80,000 in October 31, 2017 and $140,000 in October 31, 2018.
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 October 31, 2017 and $52,489 in October 31, 2018.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason ETF Investment Trust (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Period.
(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 $12,500 in October 31, 2017 and $0 in October 31, 2018. 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 Periods for products and services provided by the Auditor were $0 in October 31, 2017 and $0 in October 31, 2018, 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.
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% and 100% for October 31, 2017 and October 31, 2018; Tax Fees were 100% and 100% for October 31, 2017 and October 31, 2018; and Other Fees were 100% and 100% for October 31, 2017 and October 31, 2018.
(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 $160,000 in October 31, 2017 and $678,000 in October 31, 2018.
(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.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
| a) | The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) 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 EQUITY 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. |
| 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
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: | December 27, 2018 | |
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: | December 27, 2018 | |
| By: | /s/ Richard F. Sennett | |
| Richard F. Sennett | ||
| Principal Financial Officer | ||
| Date: | December 27, 2018 | |