ETF Trends
ETF Trends

Seasoned fund industry player Legg Mason Inc. (NYSE: LM) has launched four smart-beta or alternative index-based exchange traded funds that bring institutional styled strategies to retail investors.

The new Legg Mason ETFs highlight the importance of risk management, especially during the current environment of heightened volatility.

For instance on Monday, the huge 7% sell-off in China has dragged on the emerging markets space – Chinese stocks make up about 25% of the MSCI Emerging Markets Index. However, investors could have diminished their exposure to this more volatile segment of the developing world through a smart-beta ETF, such as the recently launched Legg Mason Emerging Markets Diversified Core ETF (NasdaqGM: EDBI), which includes about a 10% tilt toward China.

Along with EDBI, Legg Mason has come out with the Legg Mason Developed Ex-US Diversified Core ETF (NasdaqGM: DDBI), Legg Mason US Diversified Core ETF (NasdaqGM: UDBI) and Legg Mason Low Volatility High Dividend ETF (NasdaqGM: LVHD).

Through a partnership with QS Investors, three of the new funds take a macro, top-down approach that help balance risk to deliver broad market exposure. QS Investors has provided custom solutions for institutional and pension funds for 15 years. Specifically, EDBI, DDBI, UDBI all follow QS Investors’ proprietary Diversification Based Investing (DBI) rules-based methodology.

“We broke the strategy down into a rules-based methodology so we can run it in an index,” Rick Genoni, Head of the ETF business at Legg Mason, told ETF Trends in a call.

The new funds break down the universe of securities into investment categories based on sectors and countries. The five-year return patterns of the countries and sectors are taken to uncover relationships – areas that behave alike or differently.The index then combines investment categories with more highly correlated historical performance into smaller number of so-called clusters, which are categorized based on tendency to behave similarly, or show various correlations. Each of these clusters are then equally weighted individually and also equally weighted across the portfolio to produce a diversified investment strategy.

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