Legg Mason ETF Investment Trust
Prospectus July 29, 2022
WESTERN ASSET
TOTAL RETURN ETF
NASDAQ (Ticker
Symbol): WBND
The
Securities and Exchange Commission and the Commodity Futures Trading Commission
has not approved or disapproved these securities or determined whether this
Prospectus is accurate or complete. Any statement to the contrary is a crime.
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INVESTMENT
PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE
VALUE |
Investment objective
Western
Asset Total Return ETF (the “fund”) seeks to maximize total return, consistent
with prudent investment management and liquidity
needs.
Fees and expenses of the
fund
The
accompanying table describes the fees and expenses that you may pay if you buy,
hold and sell shares of the fund. You may also be subject to additional fees,
such as brokerage commissions and other fees to financial intermediaries, which
are not reflected in the table and Example below. The management agreement
between Legg Mason ETF Investment Trust (the “Trust”) and Legg Mason Partners
Fund Advisor, LLC (“LMPFA” or the “manager”) (the “Management Agreement”)
provides that the manager will pay all operating expenses of the fund, except
interest expenses, taxes, brokerage expenses, future Rule 12b‑1 fees (if any),
acquired fund fees and expenses, extraordinary expenses and the management fee
payable to the manager under the Management Agreement. The manager will also pay
all subadvisory fees of the fund.
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Shareholder
fees |
(fees paid directly from
your investment) |
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None |
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Annual fund operating expenses
(%) |
(expenses that you pay
each year as a percentage of the value of your
investment) |
Management
fees |
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0.49 |
Distribution
and/or service (12b‑1) fees |
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0.00 |
Other
expenses |
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None |
Total
annual fund operating expenses |
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0.49 |
Fees
waived and/or expenses reimbursed1 |
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(0.04) |
Total
annual fund operating expenses after waiving fees and/or reimbursing
expenses |
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0.45 |
1 |
The
manager has agreed to waive fees and/or reimburse management fees so that
the ratio of total annual fund operating expenses will not exceed 0.45%
(subject to the same exclusions as the Management Agreement). This
arrangement cannot be terminated prior to July 31,
2023 without the Board of Trustees’
consent. |
Example:
This
example is intended to help you compare the cost of investing in the fund with
the cost of investing in other funds. The example assumes:
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You
invest $10,000 in the fund for the time periods
indicated |
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Your
investment has a 5% return each year and the fund’s operating expenses
remain the same (except that any applicable fee waiver or expense
reimbursement is reflected only through its expiration
date) |
You
may also incur usual and customary brokerage commissions and other charges when
buying or selling shares of the fund, which are not reflected in the
example.
Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
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Number of years you own
your shares ($) |
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1 year |
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3 years |
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5 years |
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10 years |
Western
Asset Total Return ETF |
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46 |
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153 |
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270 |
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611 |
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2 |
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Western
Asset Total Return ETF |
Portfolio turnover.
The fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
example, affect the fund’s performance. During the fiscal year ended
December 31, 2021, the fund’s portfolio turnover rate was 65% of the
average value of its portfolio. During the fiscal period January 1, 2022 to
March 31, 2022, the fund’s portfolio turnover rate was 10% of the average value of its
portfolio.
Principal investment
strategies
Under
normal market conditions, the fund will seek its investment objective by
investing at least 80% of its assets in a portfolio comprised of fixed income
securities, debt instruments, derivatives, equity securities of any type
acquired in reorganizations of issuers of fixed income securities or debt
instruments (“work out securities”), non‑convertible preferred securities,
warrants, cash and cash equivalents, foreign currencies, and exchange-traded
funds (“ETFs”) that provide exposure to these investments (“Principal
Investments”). Debt instruments include loans and similar debt
instruments.
As
part of its 80% policy, the fund intends to invest in derivatives that
(i) provide exposure to the Principal Investments, (ii) are used to
risk manage the fund’s holdings, and/or (iii) are used to enhance returns.
The risk management uses of derivatives will include managing
(i) investment-related risks, (ii) risks due to fluctuations in
securities prices, interest rates, or currency exchanges rates, (iii) risks
due to the credit-worthiness of an issuer, and (iv) the effective duration
of the fund’s portfolio. The types of derivatives in which the fund will invest
include swaps and security-based swaps, futures and options on futures, currency
forwards, swaptions and currency options and security options. As a result of
the fund’s use of derivatives and to serve as collateral, the fund may also hold
significant amounts of U.S. Treasury securities, cash and cash equivalents and
foreign currencies in which certain derivatives are denominated.
The
types of fixed income securities in which the fund may invest include corporate
debt securities, U.S. and non‑U.S. government securities, asset-backed
securities (“ABS”), mortgage-backed securities (“MBS”) (including commercial MBS
(“CMBS”), residential MBS (“RMBS”) and non‑agency collateralized mortgage
obligations (“CMOs”)), collateralized debt obligations (“CDOs”) and mortgage
dollar rolls. The fixed income securities and debt instruments in which the fund
may invest may pay fixed, variable or floating rates of interest. The fund will
not invest more than 20% of its portfolio in ABS and non‑agency, non‑government
sponsored enterprise and privately-issued MBS or more than 10% of the fund’s
total assets in CDOs. The fund will also not invest more than 20% of its
total assets in junior loans (e.g., debt instruments that are unsecured and
subordinated).
Although
the fund may invest in securities and debt instruments of any maturity, the fund
expects the normal range of the fund’s effective duration to be approximately 2
to 9 years. Effective duration seeks to measure the expected sensitivity of
market price to changes in interest rates, taking into account the anticipated
effects of structural complexities (for example, some bonds can be prepaid by
the issuer).
The
fund may invest up to 30% of its assets in below investment grade fixed income
securities or debt instruments. For these purposes, “investment grade” is
defined as investments with a rating at the time of purchase in one of the four
highest categories of at least one nationally recognized statistical rating
organization (“NRSRO”) (e.g., BBB‑ or higher or Baa3 or higher) or, if unrated,
securities of comparable quality at the time of purchase (as determined by the
subadviser). Securities rated below investment grade (e.g., BB+ to D or Baa1 to
C) or, if unrated, securities of comparable quality at the time of purchase (as
determined by the subadviser) are commonly known as “junk bonds” or “high yield
securities.”
The
fund may invest in securities issued by both U.S. and non‑U.S. issuers
(including issuers in emerging markets), but the fund will not invest more than
30% of its total assets in securities or debt instruments of non‑U.S. issuers or
more than 25% of its total assets directly in non‑U.S. dollar denominated
securities or debt instruments. For purposes of these limitations only,
derivatives, warrants and U.S.-listed ETFs that provide indirect exposure to the
investments described above will not be counted by the fund in calculating its
holdings in non‑U.S. issuers or in non‑U.S. dollar denominated securities or
debt instruments.
Principal risks
Risk
is inherent in all investing. The value of your investment in the fund, as well
as the amount of return you receive on your investment, may fluctuate
significantly. You may lose part or all
of your investment in the fund or your investment may not perform as well as
other similar investments. An investment in the fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation or by any
bank or government agency. The following is a list of the
principal risks of investing in the fund. The descriptions appear in
alphabetical order, not order of importance.
Asset-backed and
mortgage-backed securities risk. MBS and
ABS are subject to credit, interest rate, prepayment and extension risks. These
securities also are subject to risk of default on the underlying mortgage or
asset, particularly during periods of economic downturn. When market interest
rates increase, the market values of MBS (CMBS and RMBS) decline. At the same
time, however, mortgage refinancings and prepayments slow, which lengthens the
effective duration of these securities. As a result, the negative effect of the
interest rate increase on the market value of MBS is usually more pronounced
than it is for other types of fixed income securities, potentially increasing
the volatility of the fund. Conversely, when market interest rates decline,
while the value of MBS may increase, the rate of prepayment of the underlying
mortgages also tends to increase, which shortens the effective duration of these
securities. MBS are also subject to the risk that underlying borrowers will be
unable to meet their obligations and the value of property that secures the
mortgage may decline in value and be insufficient, upon foreclosure, to repay
the associated loan. Investments in ABS are subject to similar risks. Payment of
principal and interest on ABS is dependent largely on the cash flows generated
by the assets backing the securities. The risk of loss due to default on private
MBS and ABS is historically higher because neither the U.S.
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Western Asset Total Return
ETF |
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government
nor an agency or instrumentality has guaranteed them. MBS and ABS are subject to
heightened illiquidity risk and the liquidity of MBS and ABS may change over
time.
Asset class
risk. Securities or other assets in the
fund’s portfolio may underperform in comparison to the general financial
markets, a particular financial market or other asset classes.
Assets under
management risk. From time to time, a
third party, LMPFA and/or affiliates of LMPFA or the fund may invest in the fund
and hold its investment for a period of time in order to facilitate commencement
of the fund’s operations or to allow for the fund to achieve size or scale.
There can be no assurance that any such entity will not redeem its investment,
that it will not redeem at an inopportune time for the fund or that the size of
the fund will be maintained at a level necessary to enable the fund to remain
viable. Such redemption may cause the fund to sell assets (or invest cash) at
disadvantageous times or prices, increase or accelerate taxable gains or
transaction costs and may negatively affect the fund’s net asset value, market
price, performance, or ability to satisfy redemptions in a timely manner.
Authorized
Participant concentration risk. Only an
Authorized Participant may engage in creation or redemption transactions
directly with the fund. “Authorized Participants” are broker-dealers that are
permitted to create and redeem shares directly with the fund and who have
entered into agreements with the fund’s distributor. A limited number of
institutions act as Authorized Participants in respect of the fund. To the
extent that these institutions exit the business or are unable to process
creation and/or redemption orders with respect to the fund and no other
Authorized Participant steps forward to create or redeem, in either of these
cases, fund shares may trade at a premium or discount to net asset value and
possibly face trading halts and/or delisting.
Cash transactions
risk.
Unlike most other ETFs, the fund may effect its creations and redemptions
primarily for cash, rather than in‑kind securities. Paying redemption proceeds
in cash rather than through in‑kind delivery of portfolio securities may require
the fund to dispose of or sell portfolio investments at an inopportune time to
obtain the cash needed to distribute redemption proceeds. This may cause the
fund to incur certain costs such as brokerage costs, and to recognize gains or
losses that it might not have incurred if it had made a redemption in‑kind. As a
result, the fund may pay out higher or lower annual capital gains distributions
than ETFs that redeem in‑kind.
Commodity regulatory
risk. The fund is a “commodity pool” and
the fund’s manager is registered as a “commodity pool operator” under the
Commodity Exchange Act with respect to the fund. As a result, additional
disclosure, reporting and recordkeeping obligations mandated by the U.S.
Commodity Futures Trading Commission (“CFTC”) apply with respect to the fund.
The fund’s manager is therefore subject to dual regulation by the Securities and
Exchange Commission and the CFTC. Notwithstanding the foregoing, the CFTC has
adopted rules that allow for substituted compliance with certain CFTC disclosure
and shareholder reporting requirements based on compliance with comparable SEC
requirements. This means that for most of the CFTC’s disclosure and shareholder
reporting applicable to the manager as the fund’s commodity pool operator, the
manager’s and the fund’s compliance with SEC disclosure and shareholder
reporting requirements will be deemed to fulfill the manager’s CFTC compliance
obligations. The CFTC has neither reviewed nor approved the fund, its investment
strategies, or this prospectus.
Credit
risk. If an issuer or guarantor of
a security held by the fund or a counterparty to a financial contract with the
fund defaults or its credit is downgraded, or is perceived to be less
creditworthy, or if the value of the assets underlying a security declines, the
value of your investment will typically decline. Changes in actual or perceived
creditworthiness may occur quickly. The fund could be delayed or hindered in its
enforcement of rights against an issuer, guarantor or counterparty. Subordinated
securities (meaning securities that rank below other securities with respect to
claims on the issuer’s assets) are more likely to suffer a credit loss than
non‑subordinated securities of the same issuer and will be disproportionately
affected by a default, downgrade or perceived decline in creditworthiness.
Cybersecurity
risk. Cybersecurity incidents, both
intentional and unintentional, may allow an unauthorized party to gain access to
fund assets, fund or customer data (including private shareholder information),
or proprietary information, cause the fund, the manager, the subadviser,
Authorized Participants, the relevant listing exchange and/or their service
providers (including, but not limited to, fund accountants, custodians,
sub‑custodians, transfer agents and financial intermediaries) to suffer data
breaches, data corruption or loss of operational functionality or prevent fund
investors from purchasing or redeeming shares or receiving distributions. The
fund, the manager, and the subadviser have limited ability to prevent or
mitigate cybersecurity incidents affecting third party service providers, and
such third party service providers may have limited indemnification obligations
to the fund or the manager. Cybersecurity incidents may result in financial
losses to the fund and its shareholders, and substantial costs may be incurred
in order to prevent or mitigate any future cybersecurity incidents. Issuers of
securities in which the fund invests are also subject to cybersecurity risks,
and the value of these securities could decline if the issuers experience
cybersecurity incidents.
Because
technology is frequently changing, new ways to carry out cyber attacks are
always developing. Therefore, there is a chance that some risks have not been
identified or prepared for, or that an attack may not be detected, which puts
limitations on the fund’s ability to plan for or respond to a cyber attack. Like
other funds and business enterprises, the fund, the manager, the subadviser,
Authorized Participants, the relevant listing exchange and their service
providers are subject to the risk of cyber incidents occurring from time to
time.
Derivatives
risk. Using derivatives can increase
fund losses and reduce opportunities for gains when market prices, interest
rates, currencies or the derivatives themselves behave in a way not anticipated
by the fund’s subadviser. Using derivatives also can have a leveraging effect
and increase fund volatility. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment. Derivatives
may be difficult to sell, unwind or value, and the counterparty may default on
its obligations to the fund. Derivatives also tend to involve greater
illiquidity risk and valuation risk. The fund may be unable to terminate or sell
its derivative positions. In fact, many over‑the‑counter derivatives will not
have liquidity
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Western
Asset Total Return ETF |
beyond
the counterparty to the instrument. Derivatives are generally subject to the
risks applicable to the assets, rates, indices or other indicators underlying
the derivative. The value of a derivative may fluctuate more than the underlying
assets, rates, indices or other indicators to which it relates. Use of
derivatives may have different tax consequences for the fund than an investment
in the underlying security, and those differences may affect the amount, timing
and character of income distributed to shareholders. The U.S. government and
foreign governments are in the process of adopting and implementing regulations
governing derivatives markets, including mandatory clearing of certain
derivatives, margin and reporting requirements. The ultimate impact of the
regulations remains unclear. Additional regulation of derivatives may make
derivatives more costly, limit their availability or utility, otherwise
adversely affect their performance or disrupt
markets.
Swap
agreements tend to shift the fund’s investment exposure from one type of
investment to another. For example, the fund may enter into interest rate swaps,
which involve the exchange of interest payments by the fund with another party,
such as an exchange of floating rate payments for fixed interest rate payments
with respect to a notional amount of principal. If an interest rate swap
intended to be used as a hedge negates a favorable interest rate movement, the
investment performance of the fund would be less than what it would have been if
the fund had not entered into the interest rate
swap.
Credit
default swap contracts involve heightened risks and may result in losses to the
fund. Credit default swaps may be illiquid and difficult to value, and they
increase credit risk since the fund has exposure to both the issuer whose credit
is the subject of the swap and the counterparty to the
swap.
The
primary risks associated with the use of futures contracts are: (a) the
imperfect correlation between the change in market value of the instruments held
by the fund and the price of the futures contract; (b) the possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures contract when desired; (c) losses caused by unanticipated
market movements, which are potentially unlimited; (d) the subadviser’s
inability to predict correctly the direction of securities prices, interest
rates, currency exchange rates and other economic factors; and (e) the
possibility that the counterparty will default in the performance of its
obligations.
To
the extent that the fund writes or sells an option, in particular a naked
option, if the decline or increase in the underlying asset is significantly
below or above the exercise price of the written option, the fund could
experience a substantial loss.
Extension
risk. When interest rates rise,
repayments of fixed income securities, particularly asset- and mortgage- backed
securities, may occur more slowly than anticipated, extending the effective
duration of these fixed income securities at below market interest rates and
causing their market prices to decline more than they would have declined due to
the rise in interest rates alone. This may cause the fund’s share price to be
more volatile.
Foreign investments
and emerging markets risk. The fund’s investments in securities of
foreign issuers or issuers with significant exposure to foreign markets involve
additional risk as compared to investments in U.S. securities or issuers with
predominantly domestic exposure, such as less liquid, less transparent, less
regulated and more volatile markets. The value of the fund’s investments may
decline because of factors affecting the particular issuer as well as foreign
markets and issuers generally, such as unfavorable or unsuccessful government
actions, reduction of government or central bank support, inadequate accounting
standards and auditing and financial recordkeeping requirements, lack of
information and political, economic, financial or social instability. In
addition, there may be significant obstacles to obtaining information necessary
for investigations into or litigation against issuers located in or operating in
certain foreign markets, particularly emerging market countries, and
shareholders may have limited legal remedies. To the extent the fund focuses its
investments in a single country or only a few countries in a particular
geographic region, economic, political, regulatory or other conditions affecting
such country or region may have a greater impact on fund performance relative to
a more geographically diversified fund.
The
value of investments in securities denominated in foreign currencies increases
or decreases as the rates of exchange between those currencies and the U.S.
dollar change. Currency conversion costs and currency fluctuations could
erase investment gains or add to investment losses. Currency exchange rates can
be volatile, and are affected by factors such as general economic and political
conditions, the actions of the U.S. and foreign governments or central banks,
the imposition of currency controls and speculation. The fund may be unable or
may choose not to hedge its foreign currency
exposure.
Less
developed markets are more likely to experience problems with the clearing and
settling of trades and the holding of securities by local banks, agents and
depositories. Settlement of trades in these markets can take longer than in
other markets and the fund may not receive its proceeds from the sale of certain
securities for an extended period (possibly several weeks or even
longer).
The
risks of foreign investments are heightened when investing in issuers in
emerging market countries. Emerging market countries tend to have economic,
political and legal systems that are less developed and are less stable than
those of more developed countries. Their economies tend to be less diversified
than those of more developed countries. They typically have fewer medical and
economic resources than more developed countries, and thus they may be less able
to control or mitigate the effects of a pandemic. They are often particularly
sensitive to market movements because their market prices tend to reflect
speculative expectations. Low trading volumes may result in a lack of
liquidity and in extreme price
volatility.
Hedging
risk. There can be no assurance
that the fund will engage in hedging transactions at any given time, even under
volatile market conditions, or that any hedging transactions the fund engages in
will be successful. Hedging transactions involve costs and may reduce gains
or result in losses.
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Western Asset Total Return
ETF |
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High yield (“junk”)
bonds risk. High yield bonds are
generally subject to greater credit risks than higher-grade bonds, including the
risk of default on the payment of interest or principal. High yield bonds
are considered speculative, typically have lower liquidity and are more
difficult to value than higher grade bonds. High yield bonds tend to be volatile
and more susceptible to adverse events, credit downgrades and negative
sentiments and may be difficult to sell at a desired price, or at all, during
periods of uncertainty or market turmoil.
Illiquidity
risk. Some assets held by the fund may
be or become impossible or difficult to sell and some assets that the fund wants
to invest in may be impossible or difficult to purchase, particularly during
times of market turmoil or due to adverse changes in the conditions of a
particular issuer. These illiquid assets may also be difficult to value. Markets
may become illiquid when, for instance, there are few, if any, interested buyers
or sellers or when dealers are unwilling or unable to make a market for certain
securities. As a general matter, dealers recently have been less willing to make
markets for fixed income securities. If the fund is forced to sell an illiquid
asset to meet redemption requests or other cash needs, or to try to limit
losses, the fund may be forced to sell at a substantial loss or may not be able
to sell at all. The fund may not receive its proceeds from the sale of certain
securities for an extended period (for example, several weeks or even longer).
The liquidity of certain assets, particularly of privately-issued and
non‑investment grade MBS, ABS and CDOs, may be difficult to ascertain and may
change over time.
Investing in ETFs
risk. Unlike shares of typical mutual
funds or unit investment trusts, shares of ETFs are traded on an exchange and
may trade throughout a trading day. ETFs are bought and sold based on market
values and not at net asset value, and therefore may trade at either a premium
or discount to net asset value and may experience volatility in certain market
conditions. The fund will pay brokerage commissions in connection with the
purchase and sales of shares of ETFs. In addition, the fund will indirectly bear
its pro rata share of fees and expenses incurred by an ETF in which it invests,
including advisory fees. These expenses are in addition to management fees and
other expenses that the fund bears directly in connection with its own
operations. Certain ETFs are also subject to portfolio management risk.
Investments in ETFs are subject to the risk that the listing exchange may halt
trading of an ETF’s shares, in which case the fund would be unable to sell its
ETF shares unless and until trading is resumed.
Investment in loans
risk. Investments in loans are generally
subject to the same risks as investments in other types of debt obligations,
including, among others, credit risk, interest rate risk, prepayment risk, and
extension risk. In addition, in many cases loans are subject to the risks
associated with below-investment grade securities. This means loans are often
subject to significant credit risks, including a greater possibility that the
borrower will be adversely affected by changes in market or economic conditions
and may default or enter bankruptcy. This risk of default will increase in the
event of an economic downturn or a substantial increase in interest rates (which
will increase the cost of the borrower’s debt service). Transactions in loans
may settle on a delayed basis. As a result, the proceeds from the sale of a loan
may not be available to make additional investments or to meet the fund’s
redemption obligations. Because junior loans are unsecured and subordinated and
thus lower in priority of payment to senior loans, they are subject to the
additional risk that the cash flow of the borrower and property securing the
loan or debt, if any, may be insufficient to meet scheduled payments after
giving effect to the senior secured obligations of the borrower. Bank loans
may not be considered securities and therefore, the fund may not have the
protections afforded by U.S. federal securities laws with respect to such
investments.
Leverage
risk. The value of your investment may
be more volatile if the fund borrows or uses derivatives or other investments
that have a leveraging effect on the fund’s portfolio. Other risks also will be
compounded. This is because leverage generally magnifies the effect of a change
in the value of an asset and creates a risk of loss of value on a larger pool of
assets than the fund would otherwise have had. The fund may also have to sell
assets at inopportune times to satisfy its obligations created by the use of
leverage or derivatives. The use of leverage is considered to be a speculative
investment practice and may result in the loss of a substantial amount, and
possibly all, of the fund’s assets.
LIBOR
risk. The fund’s investments, payment
obligations, and financing terms may be based on floating rates, such as the
London Interbank Offered Rate, or “LIBOR,” which is the offered rate for
short-term Eurodollar deposits between major international banks. In 2017, the
U.K. Financial Conduct Authority (“FCA”) announced its intention to cease
compelling banks to provide the quotations needed to sustain LIBOR after 2021.
ICE Benchmark Administration, the administrator of LIBOR, ceased publication of
most LIBOR settings on a representative basis at the end of 2021 and is expected
to cease publication of a majority of U.S. dollar LIBOR settings on a
representative basis after June 30, 2023. In addition, global regulators
have announced that, with limited exceptions, no new LIBOR-based contracts
should be entered into after 2021. Actions by regulators have resulted in the
establishment of alternative reference rates to LIBOR in most major currencies.
In March 2022, the U.S. federal government enacted legislation to establish a
process for replacing LIBOR in certain existing contracts that do not already
provide for the use of a clearly defined or practicable replacement benchmark
rate as described in the legislation. Generally speaking, for contracts that do
not contain a fallback provision as described in the legislation, a benchmark
replacement recommended by the Federal Reserve Board will effectively
automatically replace the USD LIBOR benchmark in the contract after
June 30, 2023. The recommended benchmark replacement will be based on the
Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of
New York, including certain spread adjustments and benchmark replacement
conforming changes. Various financial industry groups have been planning for the
transition away from LIBOR, but there remains uncertainty regarding the impact
of the transition from LIBOR on the fund’s transactions and the financial
markets generally. The transition away from LIBOR may lead to increased
volatility and illiquidity in markets that currently rely on LIBOR and may
adversely affect the fund’s performance. The transition may also result in a
reduction in the value of certain LIBOR-based investments held by the fund or
reduce the effectiveness of related transactions such as hedges. Any such
effects of the transition away from LIBOR, as well as other unforeseen effects,
could result in losses for the fund. Since the usefulness of LIBOR as a
benchmark could also deteriorate during the transition period, effects could
occur at any time.
Market and interest
rate risk. The market prices of the
fund’s securities may go up or down, sometimes rapidly or unpredictably, due to
general market conditions, such as real or perceived adverse economic or
political conditions, tariffs and trade disruptions, inflation, substantial
economic
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Western
Asset Total Return ETF |
downturn
or recession, changes in interest rates, lack of liquidity in the bond markets
or adverse investor sentiment. If the market prices of the fund’s securities
fall, the value of your investment will decline. The value of your investment
will generally go down when interest rates rise. A rise in rates tends to have a
greater impact on the prices of longer term or duration securities. A general
rise in interest rates may cause investors to move out of fixed income
securities on a large scale, which could adversely affect the price and
liquidity of fixed income securities and could also result in increased
redemptions from the fund. Recently, there have been inflationary price
movements. As such, fixed income securities markets may experience heightened
levels of interest rate volatility and liquidity
risk.
The
maturity of a security may be significantly longer than its duration. A
security’s maturity and other features may be more relevant than its duration in
determining the security’s sensitivity to other factors affecting the issuer or
markets generally such as changes in credit quality or in the yield premium that
the market may establish for certain types of
securities.
Market events
risk. The market values of securities or
other assets will fluctuate, sometimes sharply and unpredictably, due to changes
in general market conditions, overall economic trends or events, governmental
actions or intervention, actions taken by the U.S. Federal Reserve or foreign
central banks, market disruptions caused by trade disputes or other factors,
political developments, investor sentiment, the global and domestic effects of a
pandemic, and other factors that may or may not be related to the issuer of the
security or other asset. Economies and financial markets throughout the world
are increasingly interconnected. Economic, financial or political events,
trading and tariff arrangements, public health events, terrorism, natural
disasters and other circumstances in one country or region could have profound
impacts on global economies or markets. As a result, whether or not the fund
invests in securities of issuers located in or with significant exposure to the
countries or markets directly affected, the value and liquidity of the fund’s
investments may be negatively affected.
The
rapid and global spread of a highly contagious novel coronavirus respiratory
disease, designated COVID‑19, has resulted in extreme volatility in the
financial markets; reduced liquidity of many instruments; restrictions on
international and, in some cases, local travel; significant disruptions to
business operations (including business closures); strained healthcare systems;
disruptions to supply chains, consumer demand and employee availability; and
widespread uncertainty regarding the duration and long-term effects of this
pandemic. Some sectors of the economy and individual issuers have experienced
particularly large losses. In addition, the COVID‑19 pandemic may result in a
sustained domestic or even global economic downturn or recession, domestic and
foreign political and social instability, damage to diplomatic and international
trade relations and increased volatility and/or decreased liquidity in the
securities markets. Developing or emerging market countries may be more impacted
by the COVID‑19 pandemic as they may have less established health care systems
and may be less able to control or mitigate the effects of the pandemic. The
ultimate economic fallout from the pandemic, and the long-term impact on
economies, markets, industries and individual issuers, are not known. The U.S.
government and the Federal Reserve, as well as certain foreign governments and
central banks, have taken extraordinary actions to support local and global
economies and the financial markets in response to the COVID‑19 pandemic. This
and other government intervention into the economy and financial markets to
address the COVID‑19 pandemic may not work as intended, particularly if the
efforts are perceived by investors as being unlikely to achieve the desired
results. Government actions to mitigate the economic impact of the pandemic have
resulted in a large expansion of government deficits and debt, the long term
consequences of which are not known. The COVID‑19 pandemic could adversely
affect the value and liquidity of the fund’s investments, impair the fund’s
ability to satisfy redemption requests, and negatively impact the fund’s
performance. In addition, the outbreak of COVID‑19, and measures taken to
mitigate its effects, could result in disruptions to the services provided to
the fund by its service providers.
Market trading
risk. The fund faces numerous market
trading risks, including the potential lack of an active market for fund shares,
losses from trading in secondary markets, periods of high volatility and
disruptions in the creation/redemption process. Any of these factors, among
others, may lead to the fund’s shares trading at a premium or discount to net
asset value.
Absence of active
market. Although shares of the fund are listed for trading on one
or more stock exchanges, there can be no assurance that an active trading market
for such shares will develop or be maintained by market makers or Authorized
Participants. Authorized Participants are not obligated to execute purchase or
redemption orders for Creation Units. In periods of market volatility, market
makers and/or Authorized Participants may be less willing to transact in fund
shares. The absence of an active market for the fund’s shares may contribute to
the fund’s shares trading at a premium or discount to net asset
value.
Shares of the fund may trade at
prices other than net asset value. Shares of the fund trade on
stock exchanges at prices at, above or below the fund’s most recent net asset
value. The net asset value of the fund is calculated at the end of each business
day and fluctuates with changes in the market value of the fund’s holdings. The
trading price of the fund’s shares fluctuates continuously throughout trading
hours based on both market supply of and demand for fund shares and the
underlying value of the fund’s portfolio holdings or net asset value. As a
result, the trading prices of the fund’s shares may deviate significantly from
net asset value during periods of market volatility, including during periods of
high redemption requests or other unusual market conditions. ANY OF THESE
FACTORS, AMONG OTHERS, MAY LEAD TO THE FUND’S SHARES TRADING AT A PREMIUM OR
DISCOUNT TO NET ASSET VALUE.
Mortgage dollar
rolls risk. Mortgage dollar rolls are
transactions in which the fund sells mortgage-backed securities (“MBS”) to a
dealer and simultaneously agrees to repurchase similar securities in the future
at a predetermined price. The fund’s mortgage dollar rolls could lose money if
the price of the mortgage-backed securities sold falls below the agreed upon
repurchase price, or if the counterparty is unable to honor the agreement. If
the counterparty files for bankruptcy or becomes insolvent, the fund’s right to
repurchase securities may be limited. Mortgage dollar roll transactions may have
a leveraging effect on the fund, making the value of an investment in the fund
more volatile, requiring the fund to liquidate portfolio securities when it may
not be advantageous to do so and magnifying any change in the fund’s net asset
value.
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Western Asset Total Return
ETF |
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7 |
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National closed
market trading risk. Where the
underlying securities held by the fund trade on foreign exchanges that are
closed when the securities exchange on which the fund’s shares trade is open,
there are likely to be deviations between the current price of such an
underlying security (i.e., during the fund’s domestic trading day) and the last
quoted price for the underlying security (i.e., the fund’s quote from the closed
foreign market), which in turn could lead to a difference between the price at
which the fund has valued the security and the value of the underlying security.
This could also result in premiums or discounts to the fund’s net asset value
that may be greater than those experienced by other ETFs.
Portfolio management
risk. The value of your investment may
decrease if the subadviser’s judgment about the quality, relative yield, value
or market trends affecting a particular security, industry, sector or region, or
about interest rates or other market factors, is incorrect or does not produce
the desired results, or if there are imperfections, errors or limitations in the
models, tools and data used by the subadviser. In addition, the fund’s
investment strategies or policies may change from time to time. Those changes
may not lead to the results intended by the subadviser and could have an adverse
effect on the value or performance of the fund. Furthermore, the implementation
of the fund’s investment strategies is subject to a number of constraints, which
could also adversely affect the fund’s value or performance.
Prepayment or call
risk. Many issuers have a right to
prepay their fixed income securities. Issuers may be more likely to prepay their
securities if interest rates fall. If this happens, the fund will not benefit
from the rise in the market price of the securities that normally accompanies a
decline in interest rates, and will be forced to reinvest prepayment proceeds at
a time when yields on securities available in the market are lower than the
yield on prepaid securities. The fund may also lose any premium it paid to
purchase the securities.
Stock market and
equity securities risk. The stock
markets are volatile and the market prices of the fund’s equity securities may
decline generally. Equity securities may include warrants, rights,
exchange-traded and over‑the‑counter common stocks, preferred stock, depositary
receipts, trust certificates, limited partnership interests and shares of other
investment companies, including exchange-traded funds and real estate investment
trusts. Equity securities may have greater price volatility than other asset
classes, such as fixed income securities, and may fluctuate in price based on
actual or perceived changes in a company’s financial condition and overall
market and economic conditions and perceptions. If the market prices of the
equity securities owned by the fund fall, the value of your investment in the
fund will decline. If the fund holds equity securities in a company that becomes
insolvent, the fund’s interests in the company will be subordinated to the
interests of debtholders and general creditors of the company, and the fund may
lose its entire investment.
Trading issues
risk. Trading in fund shares on
NASDAQ may be halted in certain circumstances. There can be no assurance that
the requirements of NASDAQ necessary to maintain the listing of the fund will
continue to be met.
Valuation
risk. The sales price the fund could
receive upon the sale of any particular portfolio investment may differ from the
fund’s valuation of the investment, particularly for securities that trade in
thin or volatile markets or that are valued using a fair value methodology.
These differences may increase significantly and affect fund investments more
broadly during periods of market volatility. Authorized Participants who
purchase or redeem fund shares on days when the fund is holding fair-valued
securities may receive fewer or more shares or lower or higher redemption
proceeds than they would have received if the fund had not fair-valued
securities or had used a different valuation methodology. The fund’s ability to
value its investments may be impacted by technological issues and/or errors by
pricing services or other third party service providers. The valuation of the
fund’s investments involve subjective judgment.
These
and other risks are discussed in more detail in the Prospectus or in the
Statement of Additional Information.
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8 |
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Western
Asset Total Return ETF |
Performance
The
accompanying bar chart and table provide some indication of the risks of
investing in the fund. The bar chart
shows changes in the fund’s performance from year to year. The table shows the
average annual total returns of the fund and also compares the fund’s
performance with the average annual total returns of an index or other
benchmark. The fund makes updated performance information,
including its current net asset value, available at www.franklintempleton.com/etfproducts
(select fund), or by calling the fund at 1‑877‑721‑1926.
The fund’s past performance
(before and after taxes) is not necessarily an indication of how the fund will
perform in the future.
Best Quarter (06/30/2020): 8.03 Worst
Quarter (03/31/2021): (4.32)
The
year‑to‑date return as of the
most recent calendar quarter, which ended June 30, 2022, was
(18.53)
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Average annual total returns
(%) |
(for periods ended
December 31, 2021) |
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1 year |
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Since inception |
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Inception date |
Return
before taxes |
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(2.98) |
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6.42 |
|
10/03/2018 |
Return
after taxes on distributions |
|
(4.55) |
|
4.55 |
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Return
after taxes on distributions and sale of fund shares |
|
(1.67) |
|
4.25 |
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Bloomberg
U.S. Aggregate Index (reflects no deduction for fees, expenses or
taxes) |
|
(1.54) |
|
5.11 |
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After‑tax returns are
calculated using the historical highest individual federal marginal income tax
rates and do not reflect the impact of state and local taxes.
Actual after‑tax returns
depend on an investor’s tax situation and may differ from those shown, and the
after‑tax returns shown are not relevant to investors who hold their fund shares
through tax‑advantaged arrangements, such as 401(k) plans or individual
retirement accounts. Returns after taxes on
distributions and sale of fund shares are higher than returns before taxes for
certain periods shown because they reflect the tax benefit of capital losses
realized on the sale of fund shares.
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Western Asset Total Return
ETF |
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9 |
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Management
Investment
manager: Legg Mason Partners Fund
Advisor, LLC (“LMPFA”)
Subadviser: Western Asset Management Company, LLC (“Western
Asset”)
Sub‑subadvisers: Western Asset Management Company Limited in London
(“Western Asset London”), Western Asset Management Company Pte. Ltd. in
Singapore (“Western Asset Singapore”) and Western Asset Management Company Ltd
in Japan (“Western Asset Japan”). References to the “subadviser” include the
subadviser and each applicable sub‑subadviser.
Investment
professionals: Primary responsibility
for the day‑to‑day management of the fund lies with the following investment
professionals. These investment professionals, all of whom are employed by
Western Asset, work together with a broader investment management team.
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Investment
professional |
|
Title |
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Investment
professional of the fund since |
S.
Kenneth Leech |
|
Chief
Investment Officer |
|
2018 |
John
Bellows |
|
Portfolio
Manager and Research Analyst |
|
2018 |
Mark
S. Lindbloom |
|
Portfolio
Manager |
|
2018 |
Frederick
R. Marki |
|
Portfolio
Manager |
|
2018 |
Julien A.
Scholnick |
|
Portfolio
Manager |
|
2018 |
Purchase and sale of fund
shares
The
fund is an actively managed exchange-traded fund (“ETF”). Individual shares of
the fund are listed on a national securities exchange and are redeemable only by
Authorized Participants in aggregated blocks of shares or multiples thereof
(“Creation Units”).
Individual
shares of the fund may only be purchased and sold in the secondary market
through a broker-dealer at market prices. Because fund shares trade at market
prices rather than at net asset value, fund shares may trade at a price greater
than net asset value (a premium) or less than net asset value (a discount).
When
buying or selling shares in the secondary market, you may incur costs
attributable to the difference between the highest price a buyer is willing to
pay to purchase shares of the fund (bid) and the lowest price a seller is
willing to accept for shares of the fund (ask) (the “bid‑ask spread”).
The
fund will only issue or redeem Creation Units to Authorized Participants who
have entered into agreements with the fund’s distributor. The fund generally
will issue or redeem Creation Units in return for a specified amount of cash
totaling the net asset value of the Creation Units.
You
may access recent information, including information on the fund’s net asset
value, market price, premiums and discounts, and bid‑ask spreads, on the fund’s
website at www.franklintempleton.com/etfproducts.
Tax information
The
fund’s distributions are generally taxable and will be taxed as ordinary income,
capital gains, or some combination of both, unless you are investing through a
tax‑advantaged account, such as a 401(k) plan or an individual retirement
account, in which case your distributions may be taxed when withdrawn from such
tax‑advantaged account.
Payments to
broker/dealers and other financial intermediaries
If
you purchase shares of the fund through a broker-dealer or other financial
intermediary (such as a bank), LMPFA or other related companies pay the
intermediary for marketing activities and presentations, educational training
programs, conferences, the development of technology platforms and reporting
systems or other services related to the sale or promotion of the fund. These
payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the fund over another
investment. Ask your salesperson or visit your financial intermediary’s website
for more information.
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10 |
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Western
Asset Total Return ETF |
More on the fund’s
investment strategies, investments and risks
Introduction
The
fund is an actively managed exchange-traded fund (“ETF”), and the shares of the
fund are listed for trading on NASDAQ. The market price for a share of the fund
may be different from the fund’s most recent net asset value (“NAV”).
ETFs
are funds that trade like other publicly traded securities. Unlike shares of a
mutual fund, which can be bought and redeemed from the issuing fund by all
shareholders at a price based on NAV, shares of the fund may be purchased or
redeemed directly from the fund at NAV solely by 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.
Investment objective
The
fund seeks to maximize total return, consistent with prudent investment
management and liquidity needs.
Principal investment
strategies
Under
normal market conditions, the fund will seek its investment objective by
investing at least 80% of its assets in a portfolio comprised of fixed income
securities, debt instruments, derivatives, equity securities of any type
acquired in reorganizations of issuers of fixed income securities or debt
instruments (“work out securities”), non‑convertible preferred securities,
warrants, cash and cash equivalents, foreign currencies, and exchange-traded
funds (“ETFs”) that provide exposure to these investments (“Principal
Investments”). Debt instruments include loans and similar debt instruments.
As
part of its 80% policy, the fund intends to invest in derivatives that
(i) provide exposure to the Principal Investments, (ii) are used to
risk manage the fund’s holdings, and/or (iii) are used to enhance returns,
such as through covered call strategies. The risk management uses of derivatives
will include managing (i) investment-related risks, (ii) risks due to
fluctuations in securities prices, interest rates, or currency exchanges rates,
(iii) risks due to the credit-worthiness of an issuer, and (iv) the
effective duration of the fund’s portfolio. The types of derivatives in which
the fund will invest include swaps and security-based swaps, futures and options
on futures, currency forwards, swaptions and currency options and security
options. As a result of the fund’s use of derivatives and to serve as
collateral, the fund may also hold significant amounts of U.S. Treasury
securities, cash and cash equivalents and foreign currencies in which certain
derivatives are denominated.
The
types of fixed income securities in which the fund may invest include corporate
debt securities, U.S. and non‑U.S. government securities, asset-backed
securities (“ABS”), mortgage-backed securities (“MBS”) (including commercial MBS
(“CMBS”), residential MBS (“RMBS”) and non‑agency collateralized mortgage
obligations (“CMOs”)), collateralized debt obligations (“CDOs”) and mortgage
dollar rolls. The fixed income securities and debt instruments in which the fund
may invest may pay fixed, variable or floating rates of interest. The fund will
not invest more than 20% of its portfolio in ABS and non‑agency, non‑government
sponsored enterprise and privately-issued MBS or more than 10% of the fund’s
total assets in CDOs. The fund will also not invest more than 20% of its total
assets in junior loans (e.g., debt instruments that are unsecured and
subordinated).
Although
the fund may invest in securities and debt instruments of any maturity, the fund
expects the normal range of the fund’s effective duration to be approximately 2
to 9 years. Effective duration seeks to measure the expected sensitivity of
market price to changes in interest rates, taking into account the anticipated
effects of structural complexities (for example, some bonds can be prepaid by
the issuer).
The
fund may invest up to 30% of its assets in below investment grade fixed income
securities or debt instruments. For these purposes, “investment grade” is
defined as investments with a rating at the time of purchase in one of the four
highest categories of at least one nationally recognized statistical rating
organization (“NRSRO”) (e.g., BBB‑ or higher or Baa3 or higher) or, if unrated,
securities of comparable quality at the time of purchase (as determined by the
subadviser). Securities rated below investment grade (e.g., BB+ to D or Baa1 to
C) or, if unrated, securities of comparable quality at the time of purchase (as
determined by the subadviser) are commonly known as “junk bonds” or “high yield
securities.”
The
fund may invest in securities issued by both U.S. and non‑U.S. issuers
(including issuers in emerging markets), but the fund will not invest more than
30% of its total assets in securities or debt instruments of non‑U.S. issuers or
more than 25% of its total assets directly in non‑U.S. dollar denominated
securities or debt instruments. For purposes of these limitations only,
derivatives, warrants and U.S.-listed ETFs that provide indirect exposure to the
investments described above will not be counted by the fund in calculating its
holdings in non‑U.S. issuers or in non‑U.S. dollar denominated securities or
debt instruments.
Investment Professionals and Security
Selection. Western Asset’s investment process combines top‑down and
bottom‑up analyses. Western Asset’s US Broad Strategy Committee, which is
chaired by the Chief Investment Officer, leads the investment process by
considering macro-economic and securities-specific insights and ideas covering
all major bond market segments from all of its macro-economic and credit
research teams around the globe, and formulates the broad top‑down investment
outlook, including a set of strategies around duration, yield curve, country,
currency and sector.
The
US Broad Market portfolios team is ultimately responsible for the fund’s
portfolio construction, making sure that allocations are consistent with Western
Asset’s overall investment themes while adhering to strategy risk/return
profiles and specific guidelines. This includes duration, curve, country,
currency and sector positioning. The portfolio managers of the fund are S.
Kenneth Leech, Mark S. Lindbloom, Julien A. Scholnick, Frederick R. Marki
and John L. Bellows. These investment professionals, all of whom are employed by
Western Asset, work together with a broader investment management team
(collectively, the “Investment Professionals”).
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Western Asset Total Return
ETF |
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11 |
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The
Investment Professionals conduct bottom‑up fundamental research and provide
input into the top‑down perspectives. “A top‑down view” incorporates
macro-economic views on growth, inflation, and fiscal and monetary policy, as
well as views on sectors (such as corporates which trade at spreads over U.S.
Treasuries) and current general market conditions and valuation levels. This
top‑down view translates into a set of strategies regarding duration, yield
curve, country, currency and sector. The Investment Professionals provide
fundamental analysis at sector and subsector levels. Incorporating the
macro-economic views of the US Broad Strategy Committee and the risk profile of
the fund’s portfolio, the Investment Professionals balance these inputs with
their industry/issuer insights in setting sector overweights and underweights.
“Bottom up fundamental research” involves detailed analysis of individual
securities, issuers, sectors and sub‑sectors. The Investment Professionals use a
security-specific process in order to assess whether securities are mispriced or
undervalued in their opinion and select securities for the fund’s portfolio. The
Investment Professionals conduct an ongoing assessment of changing credit
characteristics and of securities with characteristics such as assets perceived
to be overlooked or under-appreciated, floating or fixed interest rates, credit
quality and securities issued in mergers, as well as newly-issued securities.
Using sector and issue analyses, the Investment Professionals select issues
opportunistically in order to exploit perceived mispricings versus long-term
fundamental value that exist in the market.
The
subadviser monitors a broad set of factors that may prompt it to consider
selling or reducing a position focused on the risk/reward characteristics of a
credit. Factors include the following: whether total return and/or valuation
targets have been realized, whether there have been significant changes in
macro/micro economic analyses indicating that sector emphasis should be changed,
whether industry conditions have deteriorated, whether the issuer has changed
its business strategy, whether credit fundamentals have deteriorated and whether
the subadviser finds better relative value elsewhere in the bond market.
Maturity and duration
The
fund may invest in securities of any maturity. The maturity of a fixed income
security is a measure of the time remaining until the final payment on the
security is due. The fund expects the normal range of the fund’s effective
duration to be approximately 2 to 9 years. The effective duration of the fund
may fall outside of its expected range due to market movements. If this happens,
the fund’s subadviser will take action to bring the fund’s effective duration
back within its expected range within a reasonable period of time.
Effective
duration seeks to measure the expected sensitivity of market price to changes in
interest rates, taking into account the anticipated effects of particular
features of a security (for example, some bonds can be prepaid by the issuer).
The assumptions that are made about a security’s features and options when
calculating effective duration may prove to be incorrect. As a result, investors
should be aware that effective duration is not an exact measurement and may not
reliably predict a security’s price sensitivity to changes in yield or interest
rates.
Generally,
the longer a fund’s effective duration, the more sensitive it will be to changes
in interest rates. For example, if interest rates rise by 1%, a fund with a
two‑year effective duration would expect the value of its portfolio to decrease
by 2% and a fund with a ten‑year effective duration would expect the value of
its portfolio to decrease by 10%, all other factors being equal.
The
maturity of a security may be significantly longer than its effective duration.
A security’s maturity may be more relevant than its effective duration in
determining the security’s sensitivity to other factors such as changes in
credit quality or in the difference in yield between U.S. Treasuries and certain
other types of securities.
Credit quality
The
continued holding of a security downgraded below its rating at the time of
purchase will be evaluated on a case by case basis. As a result, the fund may
from time to time hold debt securities that are rated below investment grade in
excess of the amounts described in its investment limitations. Securities rated
below investment grade are commonly known as “junk bonds” or “high yield
securities.” To the extent not addressed above, in the event that NRSROs assign
different ratings to the same security, the subadviser will treat the security
as being rated in the highest rating category received from any one NRSRO.
Rating categories may include sub‑categories or gradations indicating relative
standing.
Derivatives
The
fund may engage in a variety of transactions using derivatives, such as swaps
and security-based swaps, futures and options on futures, currency forwards,
currency options and swaps, swaptions and other synthetic instruments.
Derivatives are financial instruments whose value depends upon, or is derived
from, the value of something else, such as one or more underlying investments,
indexes or currencies. Derivatives may be used by the fund for any of the
following purposes:
• |
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As
a means of attempting to manage risk in the fund’s portfolio
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• |
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As
a means of attempting to enhance returns, such as through covered call
strategies |
• |
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As
a means of providing exposure to Principal Investments
|
The
fund from time to time may sell protection on debt securities by entering into
credit default swaps. In these transactions, the fund is generally required to
pay the par (or other agreed-upon) value of a referenced debt security to the
counterparty in the event of a default on or downgrade of the debt security
and/or a similar credit event. In return, the fund receives from the
counterparty a periodic stream of payments over the term of the contract. If no
default occurs, the fund keeps the stream of payments and has no payment
obligations. As the seller, the fund would effectively add leverage to its
portfolio because, in addition to its net assets, the fund would be subject to
loss on the par (or other agreed-upon) value it had undertaken to pay. Credit
default swaps may also be structured based on an index or the debt of a basket
of issuers, rather than a single issuer, and
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12 |
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Western
Asset Total Return ETF |
may
be customized with respect to the default event that triggers purchase or other
factors (for example, a particular number of defaults within a basket, or
defaults by a particular combination of issuers within the basket, may trigger a
payment obligation).
The
fund may buy credit default swaps to hedge against the risk of default of debt
securities held in its portfolio or for other reasons. As the buyer of a credit
default swap, the fund would make the stream of payments described in the
preceding paragraph to the seller of the credit default swap and would expect to
receive from the seller a payment in the event of a default on the underlying
debt security or other specified event.
Using
derivatives, especially for non‑hedging purposes, may involve greater risks to
the fund than investing directly in securities, particularly as these
instruments may be very complex and may not behave in the manner anticipated by
the fund. Certain derivative transactions may have a leveraging effect on the
fund.
Use
of derivatives or similar instruments may have different tax consequences for
the fund than an investment in the underlying security, and those differences
may affect the amount, timing and character of income distributed to
shareholders.
When
the fund enters into derivative transactions, it may be required to segregate
assets, or enter into offsetting positions, in accordance with applicable
regulations. Such segregation will not limit the fund’s exposure to loss,
however, and the fund will have investment risk with respect to both the
derivative itself and the assets that have been segregated to cover the fund’s
derivative exposure. If the segregated assets represent a large portion of the
fund’s portfolio, this may impede portfolio management or the fund’s ability to
meet redemption requests or other current obligations.
Instead
of, and/or in addition to, investing directly in particular securities, the fund
may use derivatives and other synthetic instruments that are intended to provide
economic exposure to securities, issuers or other measures of market or economic
value. The fund may use one or more types of these instruments to the extent
consistent with its 80% policy.
In
October 2020, the SEC adopted new Rule 18f‑4 under the 1940 Act, which governs
the use of derivative investments and certain financing transactions (e.g.
reverse repurchase agreements) by registered investment companies. In connection
with the adoption of Rule 18f‑4, the fund will no longer be required to comply
with the asset segregation framework arising from prior SEC guidance for
covering certain derivative instruments and related transactions. Rule 18f‑4
will instead require funds that invest in derivative instruments beyond a
specified limited amount to apply a value‑at‑risk based limit to their use of
certain derivative instruments and financing transactions. Accordingly,
effective as of August 19, 2022, the asset segregation framework described
herein will no longer apply, and the fund will comply with applicable terms and
conditions of Rule 18f‑4.
The
fund’s subadviser may choose not to make use of derivatives.
Fixed income securities
Fixed
income securities represent obligations of corporations, governments and other
entities to repay money borrowed, usually at the maturity of the security. These
securities may pay fixed, variable or floating rates of interest. However, some
fixed income securities, such as zero coupon bonds, do not pay current interest
but are issued at a discount from their face values. Other fixed income
securities, such as certain MBS and ABS (as further described under
“Asset-backed and mortgage-backed securities”), make periodic payments of
interest and/or principal. Some fixed income securities are partially or fully
secured by collateral supporting the payment of interest and principal.
Variable and floating
rate securities
Variable
rate securities reset at specified intervals, while floating rate securities
reset whenever there is a change in a specified index rate. In most cases,
these reset provisions reduce the impact of changes in market interest rates on
the value of the security. However, the value of these securities may
decline if their interest rates do not rise as much, or as quickly, as other
interest rates. Conversely, these securities will not generally increase in
value if interest rates decline. The fund may also invest in inverse floating
rate debt instruments (“inverse floaters”). Interest payments on inverse
floaters vary inversely with changes in interest rates. Inverse floaters pay
higher interest (and therefore generally increase in value) when interest rates
decline, and vice versa. An inverse floater may exhibit greater price volatility
than a fixed rate obligation of similar credit quality.
Stripped securities
Certain
fixed income securities, called stripped securities, represent the right to
receive either payments of principal (“POs”) or payments of interest (“IOs”) on
underlying pools of mortgages or on government securities. The value of these
types of instruments may change more drastically during periods of changing
interest rates than debt securities that pay both principal and interest.
Interest-only and principal-only mortgage-backed securities are especially
sensitive to interest rate changes, which can affect not only their prices but
can also change the prepayment assumptions about those investments and income
flows the fund receives from them.
Corporate debt
Corporate
debt securities are fixed income securities usually issued by businesses to
finance their operations. Various types of business entities may issue these
securities, including corporations, trusts, limited partnerships, limited
liability companies and other types of non‑governmental legal
entities. Notes, bonds, debentures and commercial paper are the most common
types of corporate debt securities, with the primary difference being their
maturities and secured or unsecured status. Commercial paper has the shortest
term and is usually unsecured. The broad category of corporate debt securities
includes debt issued by U.S. or non‑U.S. companies of all kinds, including those
with small, mid and large capitalizations. Corporate debt may carry variable or
floating rates of interest.
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Western Asset Total Return
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13 |
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Loans
The
primary risk in an investment in loans is that borrowers may be unable to meet
their interest and/or principal payment obligations. Loans in which the fund
invests may be made to finance highly leveraged borrowers which may make such
loans especially vulnerable to adverse changes in economic or market conditions.
Loans in which the fund may invest may be either collateralized or
uncollateralized and senior or subordinate (including covenant lite loans).
Investments in uncollateralized and/or subordinate loans entail a greater risk
of nonpayment than do investments in loans that hold a more senior position in
the borrower’s capital structure and/or are secured with collateral. In
addition, loans are generally subject to illiquidity risk. The fund may acquire
an interest in loans by purchasing participations in and/or assignments of
portions of loans from third parties or by investing in pools of loans, such as
collateralized debt obligations as further described under “Collateralized debt
obligations.” Transactions in loans may settle on a delayed basis. As a result,
the proceeds from the sale of a loan may not be available to make additional
investments or to meet the fund’s redemption obligations. Bank loans may not be
considered securities and therefore, the fund may not have the protections
afforded by U.S. federal securities laws with respect to such investments.
U.S. government
obligations
U.S.
government obligations include U.S. Treasury obligations and other obligations
of, or guaranteed by, the U.S. government, its agencies or government-sponsored
entities. Although the U.S. government guarantees principal and interest
payments on securities issued by the U.S. government and some of its agencies,
such as securities issued by the U.S. Government National Mortgage Association
(“Ginnie Mae”), this guarantee does not apply to losses resulting from declines
in the market value of these securities. U.S. government obligations include
zero coupon securities that make payments of interest and principal only upon
maturity and which therefore tend to be subject to greater volatility than
interest bearing securities with comparable maturities.
Some
of the U.S. government securities that the fund may hold are not guaranteed or
backed by the full faith and credit of the U.S. government, such as those issued
by Fannie Mae (formally known as the Federal National Mortgage Association) and
Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation). The
maximum potential liability of the issuers of some U.S. government obligations
may greatly exceed their current resources, including any legal right to support
from the U.S. government.
Sovereign debt
The
fund may invest in sovereign debt, including emerging market sovereign debt.
Sovereign debt securities may include:
• |
|
Fixed
income securities issued or guaranteed by governments, governmental
agencies or instrumentalities and their political subdivisions
|
• |
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Fixed
income securities issued by government-owned, controlled or sponsored
entities |
• |
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Interests
issued for the purpose of restructuring the investment characteristics of
instruments issued by any of the above issuers |
• |
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Brady
Bonds, which are debt securities issued under the framework of the Brady
Plan as a means for debtor nations to restructure their outstanding
external indebtedness |
• |
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Participations
in loans between governments and financial institutions
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• |
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Fixed
income securities issued by supranational entities such as the World Bank.
A supranational entity is a bank, commission or company established or
financially supported by the national governments of one or more countries
to promote reconstruction or development |
Sovereign
government and supranational debt involve many of the risks of foreign and
emerging markets investments as well as the risk of debt moratorium, repudiation
or renegotiation and the fund may be unable to enforce its rights against the
issuers.
Asset-backed and
mortgage-backed securities
MBS
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. MBS may be issued by
private issuers, by government-sponsored entities such as Fannie Mae or Freddie
Mac or issued or guaranteed by agencies of the U.S. government, such as Ginnie
Mae.
Unlike
MBS issued or guaranteed by agencies of the U.S. government or
government-sponsored entities, MBS issued by private issuers do not have a
government or government-sponsored entity guarantee (but may have other credit
enhancement), and may, and frequently do, have less favorable collateral, credit
risk or other underwriting characteristics.
A
RMBS is comprised of a pool of mortgage loans created by banks and other
financial institutions. CMBS are a type of MBS backed by commercial mortgages
rather than residential real estate.
CMOs
are debt obligations collateralized by mortgage loans or mortgage pass-through
securities. CMOs are a type of MBS. Typically, CMOs are collateralized by Ginnie
Mae, Fannie Mae or Freddie Mac Certificates, but may also be collateralized by
whole loans or private pass-throughs (referred to as “Mortgage Assets”).
Payments of principal and of interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a “tranche,” is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
As market conditions change, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated
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Western
Asset Total Return ETF |
investment
characteristics may be significantly reduced. Such changes can result in
volatility in the market value, and in some instances reduced liquidity, of the
CMO class.
ABS
are securities, which may be issued by either a U.S. or foreign entity, that are
collateralized by any type of financial asset, such as a consumer-related loan
(e.g., credit card receivables, student loans and automobile loans), a lease, or
a secured or unsecured receivable. ABS exclude (1) securities
collateralized by residential or commercial mortgage loans, MBS, or other
financial assets derivatives of MBS and (2) CDOs.
Collateralized debt
obligations
CDOs
are comprised of collateralized bond obligations (“CBOs”) and collateralized
loan obligations (“CLOs”). CBOs are securities issued by a trust or other
special purpose entity that are backed by a diversified pool of fixed income
securities issued by U.S. or foreign governmental entities or fixed income
securities issued by U.S. or corporate issuers. CLOs are securities issued by a
trust or other special purpose entity that are collateralized by a pool of loans
by U.S. banks and participations in loans by U.S. banks that are unsecured or
secured by collateral other than real estate. CDOs are distinguishable from ABS
because they are collateralized by bank loans or by corporate or government
fixed income securities and not by consumer, and other loans made by non‑bank
lenders, including student loans. Like CMOs, CDOs generally issue separate
series or “tranches” which vary with respect to risk and yield. These tranches
can experience substantial losses due to actual defaults, increased sensitivity
to defaults due to collateral default and disappearance of subordinate tranches,
market anticipation of defaults, as well as investor aversion to CDO securities
as a class. Interest on certain tranches of a CDO may be paid in kind (paid in
the form of obligations of the same type rather than cash), which involves
continued exposure to default risk with respect to such payments.
Municipal securities
Municipal
securities include general obligation bonds, revenue bonds, housing authority
bonds, private activity bonds, industrial development bonds, residual interest
bonds, tender option bonds, tax and revenue anticipation notes, bond
anticipation notes, tax‑exempt commercial paper, municipal leases, participation
certificates and custodial receipts. General obligation bonds are backed by the
full faith and credit of the issuing entity. Revenue bonds are typically used to
fund public works projects, such as toll roads, airports and transportation
facilities, that are expected to produce income sufficient to make the payments
on the bonds, since they are not backed by the full taxing power of the
municipality. Housing authority bonds are used primarily to fund low to middle
income residential projects and may be backed by the payments made on the
underlying mortgages. Tax and revenue anticipation notes are generally issued in
order to finance short-term cash needs or, occasionally, to finance
construction. Tax and revenue anticipation notes are expected to be repaid from
taxes or designated revenues in the related fiscal period, and they may or may
not be general obligations of the issuing entity. Bond anticipation notes
are issued with the expectation that their principal and interest will be paid
out of proceeds from renewal notes or bonds and may be issued to finance such
items as land acquisition, facility acquisition and/or construction and capital
improvement projects.
Foreign and emerging
markets securities
The
fund may invest its assets in securities of foreign issuers, including
mortgage-backed securities and asset-backed securities issued by foreign
entities. The value of the fund’s foreign securities may decline because of
unfavorable government actions, political instability or the more limited
availability of accurate information about foreign issuers, as well as factors
affecting the particular issuers. The fund may invest in foreign securities
issued by issuers located in emerging market countries. The fund considers a
country to be an emerging market country, if, at the time of investment, it is
represented in the J.P. Morgan Emerging Market Bond Index Global or the J.P.
Morgan Corporate Emerging Market Bond Index Broad or categorized by the World
Bank in its annual categorization as middle- or low‑income. To the extent the
fund invests in these securities, the risks associated with investment in
foreign issuers will generally be more pronounced.
Preferred stock and
convertible securities
The
fund may invest in preferred stock and convertible securities. Preferred
stock represents equity ownership of an issuer that generally entitles the
holder to receive, in preference to the holders of common stock, dividends and a
fixed share of the proceeds resulting from a liquidation of the
company. Preferred stocks may pay dividends at fixed or variable
rates. Convertible fixed income securities convert into shares of common
stock of their issuer. Preferred stock and convertible fixed income securities
share investment characteristics of both fixed income and equity securities.
However, the value of these securities tends to vary more with fluctuations in
the underlying common stock and less with fluctuations in interest rates and
tends to exhibit greater volatility.
Equity securities
Although
the fund invests principally in fixed income securities and related investments,
the fund may from time to time invest in or receive equity securities and
equity-like securities, which include warrants, rights, exchange traded and
over‑the‑counter common stocks, baskets of equity securities such as exchange
traded funds, depositary receipts, trust certificates, limited partnership
interests and shares of other investment companies and real estate investment
trusts.
Equity
securities represent an ownership interest in the issuing company. Holders of
equity securities are not creditors of the company, and in the event of the
liquidation of the company, would be entitled to their pro rata share of the
company’s assets, if any, after creditors, including the holders of fixed income
securities, and holders of any senior equity securities are paid. Equity
securities generally have greater price volatility than fixed income securities.
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Western Asset Total Return
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15 |
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Warrants
and rights permit, but do not obligate, their holders to subscribe for other
securities. Warrants and rights are subject to the same market risks as stocks,
but may be more volatile in price. An investment in warrants or rights may be
considered speculative. In addition, the value of a warrant or right does not
necessarily change with the value of the underlying securities and a warrant or
right ceases to have value if it is not exercised prior to its expiration date.
Securities of other
investment companies
The
fund may invest in securities of other investment companies to the extent
permitted under the Investment Company Act of 1940, as amended, and the rules
thereunder (the “1940 Act”). The return on investments in other registered
investment companies will be reduced by the operating expenses, including
investment advisory expenses, of such companies, and by any sales loads or other
distribution and/or service fees or charges incurred in purchasing or selling
shares of such companies, in addition to the fund’s own fees and expenses. As
such, there is a layering of fees and expenses.
Credit downgrades and
other credit events
Credit
rating or credit quality of a security is determined at the time of
purchase. If, after purchase, the credit rating on a security is downgraded
or the credit quality deteriorates, or if the duration of a security is
extended, the subadviser will decide whether the security should be held or
sold. Upon the occurrence of certain triggering events or defaults on a security
held by the fund, or if an obligor of such a security has difficulty meeting its
obligations, the fund may obtain a new or restructured security or underlying
assets. In that case, the fund may become the holder of securities or other
assets that it could not purchase or might not otherwise hold (for example,
because they are of lower quality or are subordinated to other obligations of
the issuer) at a time when those assets may be difficult to sell or can be sold
only at a loss. In addition, the fund may incur expenses in an effort to
protect the fund’s interest in securities experiencing these events.
Zero coupon, pay‑in‑kind
and deferred interest securities
Zero
coupon, pay‑in‑kind and deferred interest securities may be used by issuers to
manage cash flow and maintain liquidity. Zero coupon securities pay no interest
during the life of the obligation but are issued at prices below their stated
maturity value. Because zero coupon securities pay no interest until maturity,
their prices may fluctuate more than other types of securities with the same
maturity in the secondary market. However, zero coupon bonds are useful as a
tool for managing duration.
Pay‑in‑kind
securities have a stated coupon, but the interest is generally paid in the form
of obligations of the same type as the underlying pay‑in‑kind securities (e.g.,
bonds) rather than in cash. These securities are more sensitive to the credit
quality of the underlying issuer and their secondary market prices may fluctuate
more than other types of securities with the same maturity.
Deferred
interest securities are obligations that generally provide for a period of delay
before the regular payment of interest begins and are issued at a significant
discount from face value.
Certain
zero coupon, pay‑in‑kind and deferred interest securities are subject to tax
rules applicable to debt obligations acquired with “original issue discount.”
The fund would generally have to accrue income on these securities for federal
income tax purposes before it receives corresponding cash payments. Because the
fund intends to make sufficient annual distributions of its taxable income,
including accrued non‑cash income, in order to maintain its federal income tax
status and avoid fund-level income and excise taxes, the fund might be required
to liquidate portfolio securities at a disadvantageous time, or borrow cash, to
make these distributions. The fund also accrues income on these securities prior
to receipt for accounting purposes. To the extent it is deemed collectible,
accrued income is taken into account when calculating the value of these
securities and the fund’s net asset value per share, in accordance with the
fund’s valuation policies.
When-issued securities,
delayed delivery, to be announced and forward commitment transactions
Securities
purchased in when-issued, delayed delivery, to be announced or forward
commitment transactions will not be delivered or paid for immediately. The fund
will set aside assets to pay for these securities at the time of the agreement.
Such transactions involve a risk of loss, for example, if the value of the
securities declines prior to the settlement date or if the assets set aside to
pay for these securities decline in value prior to the settlement date.
Therefore, these transactions may have a leveraging effect on the fund, making
the value of an investment in the fund more volatile and increasing the fund’s
overall investment exposure. Typically, no income accrues on securities the fund
has committed to purchase prior to the time delivery of the securities is made,
although the fund may earn income on securities it has set aside to cover these
positions. Financial Industry Regulatory Authority (“FINRA”) rules impose
mandatory margin requirements for certain types of when-issued, to be announced
or forward commitment transactions, with limited exceptions.
Mortgage dollar roll
transactions
In
a mortgage dollar roll transaction, there is a simultaneous sale and purchase of
an MBS for different settlement dates, where the initial seller agrees to take
delivery, upon settlement of the re‑purchase transaction, of the same or
substantially similar securities. During the roll period, the fund forgoes
principal and interest paid on the securities. The fund is compensated by
the difference between the current sales price and the forward price for the
future purchase as well as by the interest earned on the cash proceeds of the
initial sale. The fund may enter into a mortgage dollar roll transaction with
the intention of entering into an offsetting transaction whereby, rather than
accepting delivery of the security on the specified date, the fund sells the
security and agrees to repurchase a similar security at a later time.
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16 |
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Western
Asset Total Return ETF |
Investments
in mortgage dollar roll transactions involve a risk of loss if the value of the
securities that the fund is obligated to purchase declines below the purchase
price prior to the repurchase date. Mortgage dollar roll transactions may have a
leveraging effect on the fund (see “When-issued securities, delayed delivery, to
be announced and forward commitment transactions”).
Short-term investments
The
fund may invest in cash, money market instruments and short-term securities,
including repurchase agreements, U.S. government securities, bank obligations
and commercial paper. Bank obligations include certificates of deposit, time
deposits and banker’s acceptances. A repurchase agreement is a transaction in
which the fund purchases a security from a seller, subject to the obligation of
the seller to repurchase that security from the fund at a higher price. The
repurchase agreement thereby determines the yield during the fund’s holding
period, while the seller’s obligation to repurchase is secured by the value of
the underlying security held by the fund. The fund may also invest in money
market funds, which may or may not be registered under the 1940 Act and/or
affiliated with the fund’s manager or the subadviser. The return on investment
in these money market funds may be reduced by such money market funds’ operating
expenses in addition to the fund’s own fees and expenses. As such, there is a
layering of fees and expenses.
Borrowings and reverse
repurchase agreements
The
fund may enter into borrowing transactions. Borrowing may make the value of an
investment in the fund more volatile and increase the fund’s overall investment
exposure. The fund may be required to liquidate portfolio securities at a time
when it would be disadvantageous to do so in order to make payments with respect
to any borrowings. Interest on any borrowings will be a fund expense and
will reduce the value of the fund’s shares.
The
fund may enter into reverse repurchase agreements, which have characteristics
like borrowings. In a reverse repurchase agreement, the fund sells
securities to a counterparty, in return for cash, and the fund agrees to
repurchase the securities at a later date and for a higher price, representing
the cost to the fund for the cash received.
Restricted and illiquid
securities
Restricted
securities are securities subject to legal or contractual restrictions on their
resale. An “illiquid security” is any security which the fund reasonably expects
cannot be sold or disposed of in current market conditions in seven calendar
days or less without the sale or disposition significantly changing the market
value of the security. Such conditions might prevent the sale of such securities
at a time when the sale would otherwise be desirable. The fund will not acquire
“illiquid securities” if such acquisition would cause the aggregate value of
illiquid securities to exceed 15% of the fund’s net assets. The fund may
determine that some restricted securities can be more readily sold, for example
to qualified institutional buyers pursuant to SEC Rule 144A, and therefore may
treat certain such securities as “liquid” for purposes of limitations on the
amount of illiquid securities it may own. Investing in these restricted
securities could have the effect of increasing the fund’s illiquidity if
qualified buyers become, for a time, uninterested in buying these securities.
These securities may be difficult to value, and the fund may have difficulty
disposing of such securities promptly. The fund does not consider non‑U.S.
securities to be restricted if they can be freely sold in the principal markets
in which they are traded, even if they are not registered for sale in the United
States.
Structured instruments
The
fund may invest in various types of structured instruments, including securities
that have demand, tender or put features, or interest rate reset features. These
may include instruments issued by structured investment or special purpose
vehicles or conduits, and may be asset-backed or mortgage-backed securities.
Structured instruments may take the form of participation interests or receipts
in underlying securities or other assets, and in some cases are backed by a
financial institution serving as a liquidity provider. The interest rate or
principal amount payable at maturity on a structured instrument may vary based
on changes in one or more specified reference factors, such as currencies,
interest rates, commodities, indices or other financial indicators. Changes in
the underlying reference factors may result in disproportionate changes in
amounts payable under a structured instrument. Some of these instruments may
have an interest rate swap feature which substitutes a floating or variable
interest rate for the fixed interest rate on an underlying asset or index.
Structured instruments are a type of derivative instrument and the payment and
credit qualities of these instruments derive from the assets embedded in the
structure. For structured securities that have embedded leverage features, small
changes in interest or prepayment rates may cause large and sudden price
movements. Structured instruments are often subject to heightened illiquidity
risk.
Non‑U.S. currency
transactions
The
fund may engage in non‑U.S. currency exchange transactions in an effort to
protect against uncertainty in the level of future exchange rates or to enhance
returns based on expected changes in exchange rates. Non‑U.S. currency exchange
transactions may take the form of options, futures, options on futures, swaps,
warrants, structured notes, forwards or spot (cash) transactions. The value of
these non‑U.S. currency transactions depends on, and will vary based on
fluctuations in, the value of the underlying currency relative to the U.S.
dollar.
Inflation-indexed,
inflation-protected and related securities
Inflation-indexed
and inflation-protected securities are fixed income securities that are
structured to provide protection against inflation and whose principal value or
coupon (interest payment) is periodically adjusted according to the rate of
inflation. If the index measuring inflation falls, the principal value or coupon
of these securities will be adjusted downward. Consequently, the interest
payable on these securities will be reduced.
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Western Asset Total Return
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17 |
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Also,
if the principal value of these securities is adjusted according to the rate of
inflation, the adjusted principal value repaid at maturity may be less than the
original principal.
Inflation-protected
securities denominated in the U.S. dollar include U.S. Treasury Inflation
Protected Securities (“U.S. TIPS”), as well as other bonds issued by U.S. and
non‑U.S. government agencies and instrumentalities or corporations and
derivatives related to these securities. U.S. TIPS are inflation-protected
securities issued by the U.S. Department of the Treasury the principal amounts
of which are adjusted daily based upon changes in the rate of inflation (as
currently represented by the non‑seasonally adjusted Consumer Price Index for
All Urban Consumers, calculated with a three-month lag). U.S. TIPS pay interest
semiannually, equal to a fixed percentage of the inflation-adjusted principal
amount. The interest rate on these bonds is fixed at issuance, but over the life
of the bond, this interest may be paid on an increasing or decreasing principal
amount that has been adjusted for inflation. The current market value of U.S.
TIPS is not guaranteed and will fluctuate.
The
value of inflation-indexed and inflation-protected securities held by the fund
fluctuates in response to changes in real interest rates. In addition, if
nominal interest rates increase at a faster rate than inflation, causing real
interest rates to rise, it will lead to a decrease in the value of
inflation-indexed or inflation-protected securities.
The
fund may invest in other fixed-income securities that, in the belief of the
fund’s subadviser, will provide protection against inflation, including floating
rate and other short duration securities. Floating rate securities bear interest
at rates that are not fixed but vary with changes in specified market rates or
indices, such as the prime rate, and at specified intervals.
Exchange-traded funds
(ETFs)
The
fund may invest in ETFs that are registered as investment companies under the
1940 Act. Typically, an index-based ETF seeks to track (positively or
negatively) the performance of an index by holding in its portfolio either the
same securities that comprise the index or a representative sample of the index.
Investing in an ETF gives the fund exposure to the securities comprising the
index on which the ETF is based and the fund will gain or lose value depending
on the performance of the index. The fund will indirectly bear its proportionate
share of the advisory fees and other expenses that are charged by the ETF in
addition to the management fees and other expenses paid by the fund. The fund
will also pay brokerage commissions in connection with the purchase and sale of
shares of ETFs.
Covered calls
The
fund’s covered call strategy focuses on options on U.S. Treasury futures. In
entering an options contract, the buyer is purchasing the right to buy (called a
call option) or to sell (called a put option) the underlying futures contract.
For example, a call option on a 10‑year U.S. Treasury Note, gives the buyer the
right to assume a long position on it while the seller is obligated to take a
short position if the buyer chooses to exercise the option. In the case of a put
option, the buyer has the right to a short position in the 10‑year U.S. Treasury
Note futures contract while the seller in this case must assume a long position
in the futures contract. An option is said to be covered if the option writer
(seller) holds an offsetting position in the underlying futures contract. For
example, a writer of a 10‑year U.S Treasury Note futures contract would be
called covered if the seller either owns cash market U.S. Treasury Notes or is
long on the 10‑year U.S. Treasury Note futures contract. The seller’s risk in
selling a covered call is limited as the obligation towards the buyer can be met
either by the ownership of the futures position or the cash security tied to the
underlying futures contract.
Cash management
The
fund may hold cash pending investment, and may invest in money market funds and
other money market instruments for cash management purposes. The amount of
assets the fund may hold for cash management purposes will depend on market
conditions and the need to meet expected redemption requests.
Defensive investing
The
fund may depart from its principal investment strategies in response to adverse
market, economic or political conditions by taking temporary defensive
positions, including by investing in any type of money market instruments and
short-term debt securities or holding cash without regard to any percentage
limitations. If a significant amount of the fund’s assets is used for
defensive investing purposes, the fund will be less likely to achieve its
investment objective. Although the subadvisers have the ability to take
defensive positions, they may choose not to do so for a variety of reasons, even
during volatile market conditions.
Other investments
The
fund may also use other strategies and invest in other investments that are
described, along with their risks, in the Statement of Additional Information
(“SAI”). However, the fund might not use all of the strategies and
techniques or invest in all of the types of investments described in this
Prospectus or in the SAI.
Percentage and other
limitations
The
fund’s compliance with its investment limitations (other than the limitation on
borrowing and illiquid investments) and requirements described in this
Prospectus is usually determined at the time of investment. If such a percentage
limitation is complied with at the time of an investment, any subsequent change
resulting from a change in asset values or characteristics will not constitute a
violation of that limitation.
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Western
Asset Total Return ETF |
Important information
The
fund’s investment objective may be changed by the Board of Trustees (the
“Board”) without shareholder approval and on 60 days’ notice to shareholders.
There is no assurance that the fund will meet its investment objective.
The
fund will consider an issuer to be a “non‑U.S. issuer” if the issuer is a
non‑U.S. government (including any sub‑division, agency or instrumentality of a
non‑U.S. government), a supranational entity or any other issuer (including
corporate issuers) organized under the laws of a country outside of the United
States and having a principal place of business outside of the United States.
The fund will consider all other issuers to be “U.S. issuers.”
The
fund will consider the entity that issues the security backed by the pool of
assets supporting a MBS or ABS to be the “issuer” for purposes of its investment
limitations set forth above.
The
fund’s 80% investment policy may be changed by the Board without shareholder
approval upon 60 days’ prior notice to shareholders.
The
fund’s other investment strategies and policies may be changed from time to time
without shareholder approval, unless specifically stated otherwise in this
Prospectus or in the SAI.
More on risks of
investing in the fund
Following
is more information on the principal risks summarized above and additional risks
of investing in the fund.
Below
are descriptions of the main factors that may play a role in shaping the fund’s
overall risk profile. The descriptions appear in alphabetical order, not in
order of importance.
Asset-backed and
mortgage-backed securities risk. MBS and
ABS, like traditional fixed-income securities, are subject to credit, interest
rate, prepayment and extension risks.
Small
movements in interest rates (both increases and decreases) may quickly and
significantly reduce the value of certain MBS. The fund’s investments in ABS are
subject to risks similar to those associated with mortgage-related securities,
as well as additional risks associated with the nature of the assets and the
servicing of those assets. These securities also are subject to the risk of
default on the underlying mortgage or assets, particularly during periods of
economic downturn. The risk of loss due to default on private MBS and ABS is
historically higher because neither the U.S. government nor an agency or
instrumentality has guaranteed them. Certain CMBS are issued in several classes
with different levels of yield and credit protection. The fund’s investments in
CMBS with several classes may be in the lower classes that have greater risks
than the higher classes, including greater interest rate, credit and prepayment
risks. MBS and ABS are subject to heightened illiquidity risk and the liquidity
of MBS and ABS may change over time.
MBS
may be either pass-through securities or CMOs. Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders. CMOs are created by
dividing the principal and interest payments collected on a pool of mortgages
into several revenue streams (tranches) with different priority rights to
portions of the underlying mortgage payments. Certain CMO tranches may represent
a right to receive interest only (“IOs”), principal only (“POs”) or an amount
that remains after floating-rate tranches are paid (an inverse floater). These
securities are frequently referred to as “mortgage derivatives” and may be
extremely sensitive to changes in interest rates. Interest rates on inverse
floaters, for example, vary inversely with a short-term floating rate (which may
be reset periodically). Interest rates on inverse floaters will decrease when
short-term rates increase, and will increase when short-term rates decrease.
These securities have the effect of providing a degree of investment leverage.
In response to changes in market interest rates or other market conditions, the
value of an inverse floater may increase or decrease at a multiple of the
increase or decrease in the value of the underlying securities. If the fund
invests in CMO tranches (including CMO tranches issued by government agencies)
and interest rates move in a manner not anticipated by fund management, it is
possible that the fund could lose all or substantially all of its investment.
Certain MBS in which the fund may invest may also provide a degree of investment
leverage, which could cause the fund to lose all or substantially all of its
investment.
The
value of MBS may be affected by changes in credit quality or value of the
mortgage loans or other assets that support the securities. In addition, for
MBS, when market conditions result in an increase in the default rates on the
underlying mortgages and the foreclosure values of the underlying real estate
are below the outstanding amount of the underlying mortgages, collection of the
full amount of accrued interest and principal on these investments may be
doubtful. For mortgage derivatives and structured securities that have embedded
leverage features, small changes in interest or prepayment rates may cause large
and sudden price movements. Mortgage derivatives can also become illiquid and
hard to value in declining markets.
ABS
are structured like MBS and are subject to many of the same risks. The ability
of an issuer of ABS to enforce its security interest in the underlying assets or
to otherwise recover from the underlying obligor may be limited. Certain ABS
present a heightened level of risk because, in the event of default, the
liquidation value of the underlying assets may be inadequate to pay any unpaid
principal or interest.
Asset class
risk. Securities or other assets in the
fund’s portfolio may underperform in comparison to the general financial
markets, a particular financial market or other asset classes. This may cause
the fund to underperform other investment vehicles that invest in different
asset classes.
Assets under
management risk. From time to time, a
third party, LMPFA and/or affiliates of LMPFA or the fund may invest in the fund
and hold its investment for a period of time in order to facilitate commencement
of the fund’s operations or to allow for the fund to achieve size or scale.
There can be no assurance that any such entity will not redeem its investment,
that it will not redeem at an inopportune time for the fund or that the size of
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the
fund will be maintained at a level necessary to enable the fund to remain
viable. Such redemption may cause the fund to sell assets (or invest cash) at
disadvantageous times or prices, increase or accelerate taxable gains or
transaction costs and may negatively affect the fund’s net asset value, market
price, performance, or ability to satisfy redemptions in a timely manner.
Authorized
Participant concentration risk. Only an
Authorized Participant may engage in creation or redemption transactions
directly with the fund. “Authorized Participants” are broker-dealers that are
permitted to create and redeem shares directly with the fund and who have
entered into agreements with the fund’s distributor. A limited number of
institutions act as Authorized Participants in respect of the fund. To the
extent that these institutions exit the business or are unable to process
creation and/or redemption orders with respect to the fund and no other
Authorized Participant steps forward to create or redeem, in either of these
cases, fund shares may trade at a premium or discount to net asset value and
possibly face trading halts and/or delisting.
Cash management and
defensive investing risk. The value of
the investments held by the fund for cash management or defensive investing
purposes can fluctuate. Like other fixed income securities, they are subject to
risk, including market, interest rate and credit risk. If the fund holds cash
uninvested, the cash will be subject to the credit risk of the depository
institution holding the cash and the fund will not earn income on the cash. If a
significant amount of the fund’s assets is used for cash management or defensive
investing purposes, the fund will be less likely to achieve its investment
objective. Defensive investing may not work as intended and the value of an
investment in the fund may still decline.
Cash transactions
risk.
Unlike many ETFs, the fund may effect its creations and redemptions
primarily for cash, rather than in‑kind securities. Other more conventional ETFs
generally are able to make in‑kind redemptions and avoid realizing gains in
connection with transactions designed to meet redemption requests. Effecting all
redemptions for cash may cause the fund to sell portfolio securities in order to
obtain the cash needed to distribute redemption proceeds. Such dispositions may
occur at an inopportune time resulting in potential losses to the fund and
involve transaction costs. If the fund recognizes a capital loss on these sales,
the loss will offset capital gains, if any, which may reduce the amount of
capital gain distributions from the fund. If the fund recognizes gain on these
sales, this generally will cause the fund to recognize gain it might not
otherwise have recognized if it were to distribute portfolio securities in‑kind
or to recognize such gain sooner than would otherwise be required. The fund
generally intends to distribute these gains to shareholders to avoid being taxed
on this gain at the fund level and otherwise comply with the special tax rules
that apply to it. This strategy may cause shareholders to be subject to tax on
gains they would not otherwise be subject to, or at an earlier date than, if
they had made an investment in a more conventional ETF.
In
addition, cash transactions may have to be carried out over several days if the
securities market is relatively illiquid and may involve considerable brokerage
fees and taxes. These brokerage fees and taxes, which will be higher than if the
fund sold and redeemed its shares primarily in‑kind, will generally be passed on
to purchasers and redeemers of Creation Units in the form of creation and
redemption transaction fees. To the extent transaction and other costs
associated with a redemption exceed the redemption fee, those transaction costs
might be borne by the fund’s remaining shareholders. In addition, these factors
may result in wider spreads between the bid and the offered prices of the fund’s
shares than for more conventional ETFs.
Collateralized debt
obligations risk. In addition to the
typical risks associated with fixed-income securities and ABS, CDOs carry
additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest
or other payments; (ii) the risk that the collateral may default or decline
in value or be downgraded, if rated by a NRSRO; (iii) the fund may invest
in tranches of CDOs that are subordinate to other tranches of the issuer’s
securities; (iv) the structure and complexity of the transaction and the
legal documents could lead to disputes among investors regarding the
characterization of proceeds and the entitlement to those proceeds; (v) the
investment returns achieved by the fund could be significantly different than
those predicted by financial models; (vi) the lack of a readily available
secondary market for CDOs; (vii) the risk of forced “fire sale” liquidation
due to technical defaults such as coverage test failures; and (viii) the
CDO’s manager may perform poorly. CDOs are subject to heightened illiquidity
risk and the liquidity of CDOs may change over time.
Commodity regulatory
risk. The fund is a “commodity pool” and
the fund’s manager is registered as a “commodity pool operator” under the
Commodity Exchange Act with respect to the fund. As a result, additional
disclosure, reporting and recordkeeping obligations mandated by the U.S.
Commodity Futures Trading Commission (“CFTC”) apply with respect to the fund.
The fund’s manager is therefore subject to dual regulation by the Securities and
Exchange Commission and the CFTC. Notwithstanding the foregoing, the CFTC has
adopted rules that allow for substituted compliance with certain CFTC disclosure
and shareholder reporting requirements based on compliance with comparable SEC
requirements. This means that for most of the CFTC’s disclosure and shareholder
reporting applicable to the manager as the fund’s commodity pool operator, the
manager’s and the fund’s compliance with SEC disclosure and shareholder
reporting requirements will be deemed to fulfill the manager’s CFTC compliance
obligations. The CFTC has neither reviewed nor approved the fund, its investment
strategies, or this prospectus.
Covered call
risk. Covered call risk is the risk that
the fund, as issuer of the call option, will forgo any profit from increases in
the market value of the underlying security or futures contract covering the
call option above the sum of the premium and the strike price of the call but
retain the risk of loss if the underlying security or futures contract declines
in value. The fund will have no control over the exercise of the option by the
option holder and may lose the benefit from any capital appreciation on the
underlying security or futures contract. A number of factors may influence the
option holder’s decision to exercise the option, including the value of the
underlying security or futures contract, price volatility, dividend yield and
interest rates. To the extent that these factors increase the value of the call
option, the option holder is more likely to exercise the option, which may
negatively affect the fund.
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Credit
risk. The value of your investment in
the fund could decline if the issuer of a security held by the fund or another
obligor for that security (such as a party offering credit enhancement) fails to
pay, otherwise defaults, is perceived to be less creditworthy, becomes insolvent
or files for bankruptcy. The value of your investment in the fund could also
decline if the credit rating of a security held by the fund is downgraded or the
credit quality or value of any assets underlying the security declines. Changes
in actual or perceived creditworthiness may occur quickly. If the fund enters
into financial contracts (such as certain derivatives, repurchase agreements,
reverse repurchase agreements, and when-issued, delayed delivery and forward
commitment transactions), the fund will be subject to the credit risk presented
by the counterparty. In addition, the fund may incur expenses in an effort
to protect the fund’s interests or to enforce its rights against an issuer,
guarantor or counterparty or may be hindered or delayed in exercising those
rights. Credit risk is broadly gauged by the credit ratings of the
securities in which the fund invests. However, ratings are only the opinions of
the companies issuing them and are not guarantees as to quality. Securities
rated in the lowest category of investment grade (Baa/BBB) may possess certain
speculative characteristics. Credit risk is typically greatest for the
fund’s high yield debt securities (“junk” bonds), which are rated below the
Baa/BBB categories or unrated securities of comparable quality.
The
fund may invest in subordinated securities, which are securities that rank below
other securities with respect to claims on an issuer’s assets, or securities
which represent interests in pools of such subordinated securities. The fund is
more likely to suffer a credit loss on subordinated securities than on
non‑subordinated securities of the same issuer. If there is a default,
bankruptcy or liquidation of the issuer, most subordinated securities are paid
only if sufficient assets remain after payment of the issuer’s non‑subordinated
securities. In addition, any recovery of interest or principal may take more
time. As a result, even a perceived decline in creditworthiness of the issuer is
likely to have a greater adverse impact on subordinated securities.
Cybersecurity
risk. Cybersecurity incidents, both
intentional and unintentional, may allow an unauthorized party to gain access to
fund assets, fund or customer data (including private shareholder information),
or proprietary information, cause the fund, the manager, the subadviser,
Authorized Participants, the relevant listing exchange and/or their service
providers (including, but not limited to, fund accountants, custodians,
sub‑custodians, transfer agents and financial intermediaries) to suffer data
breaches, data corruption or loss of operational functionality or prevent fund
investors from purchasing or redeeming shares or receiving distributions. The
fund, the manager, and the subadviser have limited ability to prevent or
mitigate cybersecurity incidents affecting third party service providers, and
such third party service providers may have limited indemnification obligations
to the fund or the manager. Cybersecurity incidents may result in financial
losses to the fund and its shareholders, and substantial costs may be incurred
in order to prevent or mitigate any future cybersecurity incidents. Issuers of
securities in which the fund invests are also subject to cybersecurity risks,
and the value of these securities could decline if the issuers experience
cybersecurity incidents.
Because
technology is frequently changing, new ways to carry out cyber attacks are
always developing. Therefore, there is a chance that some risks have not been
identified or prepared for, or that an attack may not be detected, which puts
limitations on the fund’s ability to plan for or respond to a cyber attack. Like
other funds and business enterprises, the fund, the manager, the subadviser,
Authorized Participants, the relevant listing exchange and their service
providers are subject to the risk of cyber incidents occurring from time to
time.
Derivatives
risk. Derivatives involve special risks
and costs and may result in losses to the fund, even when used for hedging
purposes. Using derivatives can increase losses and reduce opportunities for
gains when market prices, interest rates, currencies, or the derivatives
themselves behave in a way not anticipated by the fund’s subadviser, especially
in abnormal market conditions. Using derivatives also can have a leveraging
effect which may increase investment losses and increase the fund’s volatility,
which is the degree to which the fund’s share price may fluctuate within a short
time period. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment. The other parties to certain
derivatives transactions present the same types of credit risk as issuers of
fixed income securities.
The
fund’s counterparty to a derivative transaction may not honor its obligations in
respect to the transaction. In certain cases, the fund may be hindered or
delayed in exercising remedies against or closing out derivative instruments
with a counterparty, which may result in additional losses.
Derivatives
also tend to involve greater illiquidity risk and they may be difficult to
value. The fund may be unable to terminate or sell its derivative positions. In
fact, many over‑the‑counter derivatives will not have liquidity except through
the counterparty to the instrument. Derivatives are generally subject to the
risks applicable to the assets, rates, indices or other indicators underlying
the derivative. The value of a derivative may fluctuate more than the underlying
assets, rates, indices or other indicators to which it relates. Use of
derivatives or similar instruments may have different tax consequences for the
fund than an investment in the underlying security, and those differences may
affect the amount, timing and character of income distributed to shareholders.
The fund’s use of derivatives may also increase the amount of taxes payable by
shareholders. The U.S. government and foreign governments are in the process of
adopting and implementing regulations governing derivatives markets, including
mandatory clearing of certain derivatives, margin, and reporting requirements.
The ultimate impact of the regulations remains unclear. Additional
regulation of derivatives may make derivatives more costly, limit their
availability or utility, otherwise adversely affect their performance or disrupt
markets. The fund may be exposed to additional risks as a result of the
additional regulations. The extent and impact of the additional regulations are
not yet fully known and may not be for some time.
Investments
by the fund in structured securities, a type of derivative, raise certain tax,
legal, regulatory and accounting issues that may not be presented by direct
investments in securities. These issues could be resolved in a manner that could
hurt the performance of the fund.
Swap
agreements tend to shift the fund’s investment exposure from one type of
investment to another. For example, the fund may enter into interest rate swaps,
which involve the exchange of interest payments by the fund with another party,
such as an exchange of floating rate payments for fixed interest rate payments
with respect to a notional amount of principal. If an interest rate swap
intended to be used as a hedge negates a favorable
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interest
rate movement, the investment performance of the fund would be less than what it
would have been if the fund had not entered into the interest rate swap.
Credit
default swap contracts involve heightened risks and may result in losses to the
fund. Credit default swaps may be illiquid and difficult to value. If the fund
buys a credit default swap, it will be subject to the risk that the credit
default swap may expire worthless, as the credit default swap would only
generate income in the event of a default on the underlying debt security or
other specified event. As a buyer, the fund would also be subject to credit risk
relating to the seller’s payment of its obligations in the event of a default
(or similar event). If the fund sells a credit default swap, it will be exposed
to the credit risk of the issuer of the obligation to which the credit default
swap relates. As a seller, the fund would also be subject to leverage risk,
because it would be liable for the full notional amount of the swap in the event
of a default (or similar event). The fund would also be subject to the risk of
loss on any securities segregated to cover the fund’s expenses under the swap.
The
absence of a central exchange or market for over‑the‑counter swap transactions
may lead, in some instances, to difficulties in trading and valuation,
especially in the event of market disruptions. Recent legislation requires
certain swaps to be executed through a centralized exchange or regulated
facility and be cleared through a regulated clearinghouse. Although this
clearing mechanism is generally expected to reduce counterparty credit risk, it
may disrupt or limit the swap market and may not result in swaps being easier to
trade or value. As swaps become more standardized, the fund may not be able to
enter into swaps that meet its investment needs. The fund also may not be able
to find a clearinghouse willing to accept a swap for clearing. In a cleared
swap, a central clearing organization will be the counterparty to the
transaction. The fund will assume the risk that the clearinghouse may be
unable to perform its obligations.
The
fund will be required to maintain its positions with a clearing organization
through one or more clearing brokers. The clearing organization will require the
fund to post margin and the broker may require the fund to post additional
margin to secure the fund’s obligations. The amount of margin required may
change from time to time. In addition, cleared transactions may be more
expensive to maintain than over‑the‑counter transactions and may require the
fund to deposit larger amounts of margin. The fund may not be able to recover
margin amounts if the broker has financial difficulties. Also, the broker may
require the fund to terminate a derivatives position under certain
circumstances. This may cause the fund to lose money. Futures are standardized,
exchange-traded contracts that obligate a purchaser to take delivery, and a
seller to make delivery, of a specific amount of an asset at a specified future
date at a specified price. The primary risks associated with the use of futures
contracts are: (a) the imperfect correlation between the change in market
value of the instruments held by the fund and the price of the futures contract;
(b) the possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired;
(c) losses caused by unanticipated market movements, which are potentially
unlimited; (d) the subadviser’s inability to predict correctly the
direction of securities prices, interest rates, currency exchange rates and
other economic factors; and (e) the possibility that the counterparty will
default in the performance of its obligations.
An
option is an agreement that, for a premium payment or fee, gives the option
holder (the purchaser) the right but not the obligation to buy (a “call option”)
or sell (a “put option”) the underlying asset (or settle for cash in an amount
based on an underlying asset, rate, or index) at a specified price (the
“exercise price”) during a period of time or on a specified date. The fund may
write a call or put option where it (i) owns or is short the underlying
security in the case of a call or put option, respectively (sometimes referred
to as a “covered option”), or (ii) does not own or is not short such
security (sometimes referred to as a “naked option”). When the fund purchases an
option, it may lose the total premium paid for it if the price of the underlying
security or other assets decreased, remained the same or failed to increase to a
level at or beyond the exercise price (in the case of a call option) or
increased, remained the same or failed to decrease to a level at or below the
exercise price (in the case of a put option). If a put or call option purchased
by the fund were permitted to expire without being sold or exercised, its
premium would represent a loss to the fund. To the extent that the fund writes
or sells an option, in particular a naked option, if the decline or increase in
the underlying asset is significantly below or above the exercise price of the
written option, the fund could experience a substantial loss.
Risks
associated with the use of derivatives are magnified to the extent that an
increased portion of the fund’s assets is committed to derivatives in general or
is invested in just one or a few types of derivatives.
Extension
risk. When interest rates rise,
repayments of fixed income securities, particularly asset- and mortgage- backed
securities, may occur more slowly than anticipated, extending the effective
duration of these fixed income securities at below market interest rates and
causing their market prices to decline more than they would have declined due to
the rise in interest rates alone. This may cause the fund’s share price to be
more volatile.
Foreign investments
and emerging markets risk. The fund’s
investments in securities of foreign issuers or issuers with significant
exposure to foreign markets involve additional risk as compared to investments
in U.S. securities or issuers with predominantly domestic exposure, such as less
liquid, less regulated, less transparent and more volatile markets. The markets
for some foreign securities are relatively new, and the rules and policies
relating to these markets are not fully developed and may change. The value of
the fund’s investments may decline because of factors affecting the particular
issuer as well as foreign markets and issuers generally, such as unfavorable or
unsuccessful government actions, tariffs and tax disputes, reduction of
government or central bank support, inadequate accounting standards and auditing
and financial recordkeeping requirements, lack of information and political,
economic, financial or social instability. The Public Company Accounting
Oversight Board, which regulates auditors of U.S. public companies, is unable to
inspect audit work papers in certain foreign or emerging market countries.
Investors in foreign countries often have limited rights and few practical
remedies to pursue shareholder claims, including class actions or fraud claims,
and the ability of the Securities and Exchange Commission, the U.S. Department
of Justice and other authorities to bring and enforce actions against foreign
issuers or foreign persons is limited. Foreign investments may also be adversely
affected by U.S. government or international interventions, restrictions or
economic sanctions, which could negatively affect the value of an investment or
result in the fund selling an investment at a
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disadvantageous
time. To the extent the fund focuses its investments in a single country or only
a few countries in a particular geographic region, economic, political,
regulatory or other conditions affecting such country or region may have a
greater impact on fund performance relative to a more geographically diversified
fund.
The
value of the fund’s foreign investments may also be affected by foreign tax
laws, special U.S. tax considerations and restrictions on receiving the
investment proceeds from a foreign country. Dividends or interest on, or
proceeds from the sale or disposition of, foreign securities may be subject to
non‑U.S. withholding or other taxes.
It
may be difficult for the fund to pursue claims against a foreign issuer or other
parties in the courts of a foreign country. Some securities issued by non‑U.S.
governments or their subdivisions, agencies and instrumentalities may not be
backed by the full faith and credit of such governments. Even where a security
is backed by the full faith and credit of a government, it may be difficult for
the fund to pursue its rights against the government. In the past, some non‑U.S.
governments have defaulted on principal and interest payments.
If
the fund buys securities denominated in a foreign currency, receives income in
foreign currencies, or holds foreign currencies from time to time, the value of
the fund’s assets, as measured in U.S. dollars, can be affected unfavorably by
changes in exchange rates relative to the U.S. dollar or other foreign
currencies. Currency exchange rates can be volatile, and are affected by factors
such as general economic and political conditions, the actions of the U.S. and
foreign governments or central banks, the imposition of currency controls and
speculation. The fund may be unable or may choose not to hedge its foreign
currency exposure.
In
certain foreign markets, settlement and clearance of trades may experience
delays in payment for or delivery of securities not typically associated with
settlement and clearance of U.S. investments. Settlement of trades in these
markets can take longer than in other markets and the fund may not receive its
proceeds from the sale of certain securities for an extended period (possibly
several weeks or even longer) due to, among other factors, low trading volumes
and volatile prices. The custody or holding of securities, cash and other assets
by local banks, agents and depositories in securities markets outside the United
States may entail additional risks. Governments or trade groups may compel local
agents to hold securities in designated depositories that may not be subject to
independent evaluation. Local agents are held only to the standards of care of
their local markets, and thus may be subject to limited or no government
oversight. In extreme cases, the fund’s securities may be misappropriated or the
fund may be unable to sell its securities. In general, the less developed a
country’s securities market is, the greater the likelihood of custody problems.
The
risks of foreign investments are heightened when investing in issuers in
emerging market countries. Emerging market countries tend to have economic,
political and legal systems that are less developed and are less stable than
those of more developed countries. Their economies tend to be less diversified
than those of more developed countries. They typically have fewer medical and
economic resources than more developed countries, and thus they may be less able
to control or mitigate the effects of a pandemic. They are often particularly
sensitive to market movements because their market prices tend to reflect
speculative expectations. Low trading volumes may result in a lack of
liquidity and in extreme price volatility. Investors should be able to tolerate
sudden, sometimes substantial, fluctuations in the value of investments in
emerging markets. Emerging market countries may have policies that restrict
investment by foreigners or that prevent foreign investors from withdrawing
their money at will.
Hedging
risk. The decision as to whether and to
what extent the fund will engage in hedging transactions to hedge against such
risks as credit risk, currency risk and interest rate risk will depend on a
number of factors, including prevailing market conditions, the composition of
the fund and the availability of suitable transactions. Hedges are sometimes
subject to imperfect matching between the derivative and the underlying asset or
index; accordingly, there can be no assurance that the fund will engage in
hedging transactions at any given time or from time to time, even under volatile
market environments, or that any such strategies, if used, will be successful.
Hedging transactions involve costs and may reduce gains or result in losses.
High yield (“junk”)
bonds risk. High yield bonds, often
called “junk” bonds, have a higher risk of issuer default or may be in default
and are considered speculative. Changes in economic conditions or developments
regarding the individual issuer are more likely to cause price volatility and
weaken the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. The value of lower-quality
debt securities often fluctuates in response to company, political, or economic
developments and can decline significantly over short as well as long periods of
time or during periods of general or regional economic difficulty. High yield
bonds may also have lower liquidity as compared to higher-rated securities,
which means the fund may have difficulty selling them at times, and it may have
to apply a greater degree of judgment in establishing a price for purposes of
valuing fund shares. High yield bonds generally are issued by less creditworthy
issuers. Issuers of high yield bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer’s bankruptcy, claims of other creditors may have priority
over the claims of high yield bond holders, leaving few or no assets available
to repay high yield bond holders. The fund may incur expenses to the extent
necessary to seek recovery upon default or to negotiate new terms with a
defaulting issuer. High yield bonds frequently have redemption features
that permit an issuer to repurchase the security from the fund before it
matures. If the issuer redeems high yield bonds, the fund may have to invest the
proceeds in bonds with lower yields and may lose income.
Illiquidity
risk. Illiquidity risk exists when
particular investments are or may become impossible or difficult to sell and
some assets that the fund wants to invest in may be impossible or difficult to
purchase. Although most of the fund’s investments must be liquid at the time of
investment, investments may be or become illiquid after purchase by the fund,
particularly during periods of market turmoil or due to adverse changes in the
conditions of a particular issuer. Markets may become illiquid when, for
instance, there are few, if any, interested buyers or sellers or when dealers
are unwilling or unable to make a market for certain securities. As a general
matter, dealers have been less willing to make markets for fixed income
securities. Recent federal banking regulations may also cause certain dealers to
reduce their inventories of certain securities, which may further
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decrease
the ability to buy or sell such securities. When the fund holds illiquid
investments, the portfolio may be harder to value, especially in changing
markets, and if the fund is forced to sell these investments to meet redemption
requests or for other cash needs, or to try to limit losses, the fund may be
forced to sell at a loss or may not be able to sell at all. The fund may
experience heavy redemptions that could cause the fund to liquidate its assets
at inopportune times or at a loss or depressed value, which could cause the
value of your investment to decline. In addition, when there is illiquidity in
the market for certain investments, the fund, due to limitations on illiquid
investments, may be unable to achieve its desired level of exposure to a certain
sector, industry or issuer. The liquidity of certain assets, particularly of
privately-issued and non‑investment grade MBS, ABS and CDOs, may be difficult to
ascertain and may change over time. Transactions in less liquid or illiquid
securities may entail transaction costs that are higher than those for
transactions in liquid securities. Further, such securities, once sold, may not
settle for an extended period (for example, several weeks or even longer). The
fund will not receive its sales proceeds until that time, which may constrain
the fund’s ability to meet its obligations (including obligations to redeeming
shareholders).
Investing in ETFs
risk. ETFs are a type of investment
company and are subject to the risks of investing in other investment companies.
Investing in securities issued by ETFs also involves risks similar to those of
investing directly in the securities and other assets held by the ETF. Unlike
shares of typical mutual funds, shares of ETFs are generally traded on an
exchange throughout a trading day and bought and sold based on market values and
not at net asset value. For this reason, shares could trade at either a premium
or discount to net asset value, which may be substantial during periods of
market stress. The trading price of an index-based ETF is expected to (but may
not) closely track the net asset value of the ETF, and the fund will generally
gain or lose value consistent with the performance of the ETF’s portfolio
securities. The fund will pay brokerage commissions in connection with the
purchase and sale of shares of ETFs. In addition, the fund will indirectly bear
its pro rata share of the fees and expenses incurred by an ETF in which it
invests, including advisory fees. These expenses are in addition to management
fees and other expenses that the fund bears directly in connection with its own
operations. Certain ETFs are also subject to portfolio management risk. An
index-based ETF may not replicate exactly the performance of the benchmark index
it seeks to track for a number of reasons, including transaction costs incurred
by the ETF, the temporary unavailability of certain index securities in the
secondary market or discrepancies between the ETF and the index with respect to
the weighting of securities or the number of securities held. Investments in
ETFs are subject to the risk that the listing exchange may halt trading of an
ETF’s shares, in which case the fund would be unable to sell its ETF shares
unless and until trading is resumed.
Investment in loans
risk. Investments in loans are generally
subject to the same risks as investments in other types of debt obligations,
including, among others, credit risk, interest rate risk, prepayment risk, and
extension risk. In addition, in many cases loans are subject to the risks
associated with below-investment grade securities. This means loans are often
subject to significant credit risks, including a greater possibility that the
borrower will be adversely affected by changes in market or economic conditions
and may default or enter bankruptcy. This risk of default will increase in the
event of an economic downturn or a substantial increase in interest rates (which
will increase the cost of the borrower’s debt service). Transactions in loans
may settle on a delayed basis. As a result, the proceeds from the sale of a loan
may not be available to make additional investments or to meet the fund’s
redemption obligations. Because junior loans are unsecured and subordinated and
thus lower in priority of payment to senior loans, they are subject to the
additional risk that the cash flow of the borrower and property securing the
loan or debt, if any, may be insufficient to meet scheduled payments after
giving effect to the senior secured obligations of the borrower. This risk
is generally higher for subordinated unsecured loans or debt, which are not
backed by a security interest in any specific collateral. Junior loans generally
have greater price volatility than senior loans and may have lower liquidity as
compared to senior loans. In addition, investments in loans may be difficult to
value and may be illiquid. The secondary market for loans may be subject to
irregular trading activity, wide bid/ask spreads, and extended trade settlement
periods, which may increase the expenses of the fund or cause the fund to be
unable to realize the full value of its investment in the loan, resulting in a
material decline in the fund’s net asset value. Opportunities to invest in loans
or certain types of loans, such as senior loans, may be limited. The limited
availability of loans may be due to a number of reasons, including that direct
lenders may allocate only a small number of loans to new investors, including
the fund. There also may be fewer loans made or available, particularly during
economic downturns. There is also a possibility that originators will not be
able to sell participations in junior loans, which would create greater credit
risk exposure for the holders of such loans. Bank loans may not be
considered securities and therefore, the fund may not have the protections
afforded by U.S. federal securities laws with respect to such
investments.
Leverage
risk. The value of your investment may
be more volatile if the fund borrows or uses derivatives or other investments
that have a leveraging effect on the fund’s portfolio. Other risks also will be
compounded. This is because leverage generally magnifies the effect of a change
in the value of an asset and creates a risk of loss of value on a larger pool of
assets than the fund would otherwise have had. The fund may also have to sell
assets at inopportune times to satisfy its obligations created by the use of
leverage or derivatives. The use of leverage is considered to be a speculative
investment practice and may result in the loss of a substantial amount, and
possibly all, of the fund’s assets.
LIBOR
risk. The fund’s investments, payment
obligations, and financing terms may be based on floating rates, such as the
London Interbank Offered Rate, or “LIBOR,” which is the offered rate for
short-term Eurodollar deposits between major international banks. In 2017, the
U.K. Financial Conduct Authority (“FCA”) announced its intention to cease
compelling banks to provide the quotations needed to sustain LIBOR after 2021.
ICE Benchmark Administration, the administrator of LIBOR, ceased publication of
most LIBOR settings on a representative basis at the end of 2021 and is expected
to cease publication of a majority of U.S. dollar LIBOR settings on a
representative basis after June 30, 2023. In addition, global regulators
have announced that, with limited exceptions, no new LIBOR-based contracts
should be entered into after 2021. Actions by regulators have resulted in the
establishment of alternative reference rates to LIBOR in most major currencies.
In March 2022, the U.S. federal government enacted legislation to establish a
process for replacing LIBOR in certain existing contracts that do not already
provide for the use of a clearly defined or practicable replacement benchmark
rate as described in the legislation. Generally speaking, for contracts that do
not contain a fallback provision as described in
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the
legislation, a benchmark replacement recommended by the Federal Reserve Board
will effectively automatically replace the USD LIBOR benchmark in the contract
after June 30, 2023. The recommended benchmark replacement will be based on
the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve
Bank of New York, including certain spread adjustments and benchmark replacement
conforming changes. Various financial industry groups have been planning for the
transition away from LIBOR, but there remains uncertainty regarding the impact
of the transition from LIBOR on the fund’s transactions and the financial
markets generally. The transition away from LIBOR may lead to increased
volatility and illiquidity in markets that currently rely on LIBOR and may
adversely affect the fund’s performance. The transition may also result in a
reduction in the value of certain LIBOR-based investments held by the fund or
reduce the effectiveness of related transactions such as hedges. Any such
effects of the transition away from LIBOR, as well as other unforeseen effects,
could result in losses for the fund. Since the usefulness of LIBOR as a
benchmark could also deteriorate during the transition period, effects could
occur at any time.
Market and interest
rate risk. The market prices of the
fund’s securities may go up or down, sometimes rapidly or unpredictably. If the
market prices of the fund’s securities fall, the value of your investment in the
fund will decline. The market price of a security may fall due to general market
conditions, such as real or perceived adverse economic or political conditions,
tariffs and trade disruptions, inflation, substantial economic downturn or
recession, changes in interest or currency rates, lack of liquidity in the bond
markets or adverse investor sentiment. Changes in market conditions will not
typically have the same impact on all types of securities. The market price of a
security may also fall due to specific conditions that affect a particular
sector of the securities market or a particular issuer. Your fund shares at any
point in time may be worth less than what you invested, even after taking into
account the reinvestment of fund dividends and distributions.
The
market prices of securities may fluctuate significantly when interest rates
change. When interest rates rise, the value of fixed income securities, and
therefore the value of your investment in the fund, generally goes down.
Generally, the longer the maturity or duration of a fixed income security, the
greater the impact of a rise in interest rates on the security’s market price.
However, calculations of duration and maturity may be based on estimates and may
not reliably predict a security’s price sensitivity to changes in interest
rates. Recently, there have been inflationary price movements. As such, fixed
income securities markets may experience heightened levels of interest rate
volatility and liquidity risk. Moreover, securities can change in value in
response to other factors, such as credit risk. In addition, different interest
rate measures (such as short- and long-term interest rates and U.S. and non‑U.S.
interest rates), or interest rates on different types of securities or
securities of different issuers, may not necessarily change in the same amount
or in the same direction. When interest rates go down, the fund’s yield will
decline. Also, when interest rates decline, investments made by the fund may pay
a lower interest rate, which would reduce the income received by the fund.
Market events
risk. The market values of securities or
other assets will fluctuate, sometimes sharply and unpredictably, due to changes
in general market conditions, overall economic trends or events, governmental
actions or intervention, actions taken by the U.S. Federal Reserve or foreign
central banks, market disruptions caused by trade disputes or other factors,
political developments, investor sentiment, the global and domestic effects of a
pandemic, and other factors that may or may not be related to the issuer of the
security or other asset. Economies and financial markets throughout the world
are increasingly interconnected. Economic, financial or political events,
trading and tariff arrangements, public health events, terrorism, natural
disasters and other circumstances in one country or region could have profound
impacts on global economies or markets. As a result, whether or not the fund
invests in securities of issuers located in or with significant exposure to the
countries or markets directly affected, the value and liquidity of the fund’s
investments may be negatively affected.
The
rapid and global spread of a highly contagious novel coronavirus respiratory
disease, designated COVID‑19, has resulted in extreme volatility in the
financial markets; reduced liquidity of many instruments; restrictions on
international and, in some cases, local travel; significant disruptions to
business operations (including business closures); strained healthcare systems;
disruptions to supply chains, consumer demand and employee availability; and
widespread uncertainty regarding the duration and long-term effects of this
pandemic. Some sectors of the economy and individual issuers have experienced
particularly large losses. In addition, the COVID‑19 pandemic may result in a
sustained domestic or even global economic downturn or recession, domestic and
foreign political and social instability, damage to diplomatic and international
trade relations and increased volatility and/or decreased liquidity in the
securities markets. Developing or emerging market countries may be more impacted
by the COVID‑19 pandemic as they may have less established health care systems
and may be less able to control or mitigate the effects of the pandemic. The
ultimate economic fallout from the pandemic, and the long-term impact on
economies, markets, industries and individual issuers, are not known. The U.S.
government and the Federal Reserve, as well as certain foreign governments and
central banks, have taken extraordinary actions to support local and global
economies and the financial markets in response to the COVID‑19 pandemic. This
and other government intervention into the economy and financial markets to
address the COVID‑19 pandemic may not work as intended, particularly if the
efforts are perceived by investors as being unlikely to achieve the desired
results. Government actions to mitigate the economic impact of the pandemic have
resulted in a large expansion of government deficits and debt, the long term
consequences of which are not known. The COVID‑19 pandemic could adversely
affect the value and liquidity of the fund’s investments, impair the fund’s
ability to satisfy redemption requests, and negatively impact the fund’s
performance. In addition, the outbreak of COVID‑19, and measures taken to
mitigate its effects, could result in disruptions to the services provided to
the fund by its service providers.
Market trading risk.
Absence of active market. Although shares of the fund are listed for trading
on one or more stock exchanges, there can be no assurance that an active trading
market for such shares will develop or be maintained by market makers or
Authorized Participants. Authorized Participants are not obligated to execute
purchase or redemption orders for Creation Units. In periods of market
volatility, market makers and/or Authorized Participants may be less willing to
transact in fund shares. The absence of an active market for the fund’s shares
may contribute to the fund’s shares trading at a premium or discount to net
asset value.
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Risk of secondary listings. The fund’s shares may be listed or traded on U.S.
and non‑U.S. stock exchanges other than the U.S. stock exchange where the fund’s
primary listing is maintained, and may otherwise be made available to non‑U.S.
investors through funds or structured investment vehicles similar to depositary
receipts. There can be no assurance that the fund’s shares will continue to
trade on any such stock exchange or in any market or that the fund’s shares will
continue to meet the requirements for listing or trading on any exchange or in
any market. The fund’s shares may be less actively traded in certain markets
than in others, and investors are subject to the execution and settlement risks
and market standards of the market where they or their broker direct their
trades for execution. Certain information available to investors who trade fund
shares on a U.S. stock exchange during regular U.S. market hours may not be
available to investors who trade in other markets, which may result in secondary
market prices in such markets being less efficient.
Secondary market trading risk. Shares of the fund may trade in the secondary market
at times when the fund does not accept orders to purchase or redeem shares. At
such times, shares may trade in the secondary market with more significant
premiums or discounts than might be experienced at times when the fund accepts
purchase and redemption orders.
Secondary
market trading in fund shares may be halted by a stock exchange because of
market conditions or for other reasons. In addition, trading in fund shares on a
stock exchange or in any market may be subject to trading halts caused by
extraordinary market volatility pursuant to “circuit breaker” rules on the stock
exchange or market.
Shares
of the fund, similar to shares of other issuers listed on a stock exchange, may
be sold short and are therefore subject to the risk of increased volatility and
price decreases associated with being sold short.
Shares of the fund may trade at prices other than net
asset value. Shares of the fund
trade on stock exchanges at prices at, above or below the fund’s most recent net
asset value. The net asset value of the fund is calculated at the end of each
business day and fluctuates with changes in the market value of the fund’s
holdings. The trading price of the fund’s shares fluctuates continuously
throughout trading hours based on both market supply of and demand for fund
shares and the underlying value of the fund’s portfolio holdings or net asset
value. As a result, the trading prices of the fund’s shares may deviate
significantly from net asset value during periods of market volatility,
including during periods of high redemption requests or other unusual market
conditions. ANY OF THESE FACTORS, AMONG OTHERS, MAY LEAD TO THE FUND’S SHARES
TRADING AT A PREMIUM OR DISCOUNT TO NET ASSET VALUE. However, because shares can
be created and redeemed in Creation Units at net asset value, the subadviser
believes that large discounts or premiums to the net asset value of the fund are
not likely to be sustained over the long term (unlike shares of many closed‑end
funds, which frequently trade at appreciable discounts from, and sometimes at
premiums to, their net asset values). While the creation/redemption feature is
designed to make it more likely that the fund’s shares normally will trade on
stock exchanges at prices close to the fund’s next calculated net asset value,
exchange prices are not expected to correlate exactly with the fund’s net asset
value due to timing reasons, supply and demand imbalances and other factors. In
addition, disruptions to creations and redemptions, including disruptions at
market makers, Authorized Participants, or market participants, or during
periods of significant market volatility, may result in trading prices for
shares of the fund that differ significantly from its net asset value.
Authorized Participants may be less willing to create or redeem fund shares if
there is a lack of an active market for such shares or its underlying
investments, which may contribute to the fund’s shares trading at a discount to
net asset value.
Costs of buying or selling fund
shares. Buying or selling fund
shares on an exchange involves two types of costs that apply to all securities
transactions. When buying or selling shares of the fund through a broker, you
will likely incur a brokerage commission and other charges. In addition, you may
incur the cost of the “spread”; that is, the difference between what investors
are willing to pay for fund shares (the “bid” price) and the price at which they
are willing to sell fund shares (the “ask” price). There may also be regulatory
and other charges that are incurred as a result of trading activity. The spread
varies over time for shares of the fund based on trading volume and market
liquidity, and is generally narrower if the fund has more trading volume and
market liquidity and wider if the fund has less trading volume and market
liquidity. In addition, increased market volatility may cause increased spreads.
Because of the costs inherent in buying or selling fund shares, frequent trading
may detract significantly from investment results and an investment in fund
shares may not be advisable for investors who anticipate regularly trading in
fund shares.
Mortgage dollar
rolls risk. Mortgage dollar rolls are
transactions in which the fund sells mortgage-backed securities (“MBS”) to a
dealer and simultaneously agrees to repurchase similar securities in the future
at a predetermined price. The fund’s mortgage dollar rolls could lose money if
the price of the mortgage-backed securities sold falls below the agreed upon
repurchase price, or if the counterparty is unable to honor the agreement. If
the counterparty files for bankruptcy or becomes insolvent, the fund’s right to
repurchase securities may be limited. Mortgage dollar roll transactions may have
a leveraging effect on the fund, making the value of an investment in the fund
more volatile, requiring the fund to liquidate portfolio securities when it may
not be advantageous to do so and magnifying any change in the fund’s net asset
value.
National closed
market trading risk. Where the
underlying securities held by the fund trade on foreign exchanges that are
closed when the securities exchange on which the fund’s shares trade is open,
there are likely to be deviations between the current price of such an
underlying security (i.e., during the fund’s domestic trading day) and the last
quoted price for the underlying security (i.e., the fund’s quote from the closed
foreign market), which in turn could lead to a difference between the price at
which the fund has valued the security and the value of the underlying security.
This could also result in premiums or discounts to the fund’s net asset value
that may be greater than those experienced by other ETFs.
Operational
risk. Your ability to transact with the
fund or the valuation of your investment may be negatively impacted because of
the operational risks arising from factors such as processing errors and human
errors, inadequate or failed internal or external processes, failures in systems
and technology, changes in personnel, and errors caused by third party service
providers or trading counterparties. It is not possible to identify all of the
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operational
risks that may affect the fund or to develop processes and controls that
completely eliminate or mitigate the occurrence of such failures. The fund and
its shareholders could be negatively impacted as a result.
Portfolio management
risk. The value of your investment may
decrease if the subadviser’s judgment about the quality, relative yield, value
or market trends affecting a particular security, industry, sector or region, or
about interest rates or other market factors, is incorrect or does not produce
the desired results, or if there are imperfections, errors or limitations in the
models, tools and data used by the subadviser. In addition, the fund’s
investment strategies or policies may change from time to time. Those changes
may not lead to the results intended by the subadviser and could have an adverse
effect on the value or performance of the fund. Furthermore, the implementation
of the fund’s investment strategies is subject to a number of constraints, which
could also adversely affect the fund’s value or performance.
Preferred stock
risk. Preferred stock pay dividends at a
specified rate and generally have preference over common stock in the payment of
dividends and the liquidation of the issuer’s assets, but are typically junior
to the debt securities of the issuer in those same respects. Unlike interest
payments on debt securities, dividends on preferred stock are generally payable
at the discretion of the issuer’s board of directors. Shareholders of preferred
stock may suffer a loss of value if dividends are not paid. The market prices of
preferred stocks are subject to changes in interest rates and are more sensitive
to changes in the issuer’s creditworthiness than are the prices of debt
securities. Generally, under normal circumstances, preferred stock do not carry
voting rights. Preferred stock may trade less frequently and in a more limited
volume and may be subject to more abrupt or erratic price movements than other
securities.
Prepayment or call
risk. Many fixed income securities give
the issuer the option to repay or call the security prior to its maturity date.
Issuers often exercise this right when interest rates fall. Accordingly, if the
fund holds a fixed income security subject to prepayment or call risk, it will
not benefit fully from the increase in value that other fixed income securities
generally experience when interest rates fall. Upon prepayment of the
security, the fund would also be forced to reinvest the proceeds at then current
yields, which would be lower than the yield of the security that was paid off.
In addition, if the fund purchases a fixed income security at a premium (at a
price that exceeds its stated par or principal value), the fund may lose the
amount of the premium paid in the event of prepayment.
Redemptions by
affiliated funds and by other significant investors. The fund may be an investment option for mutual
funds and ETFs that are managed by LMPFA and its affiliates, including Franklin
Templeton investment managers, as “funds of funds,” unaffiliated mutual funds
and ETFs and other investors with substantial investments in the fund. As a
result, from time to time, the fund may experience relatively large redemptions
and could be required to liquidate its assets at inopportune times or at a loss
or depressed value, which could cause the value of your investment to decline.
Risk of investing in
fewer issuers. To the extent the fund
invests its assets in a small number of issuers, or in issuers in related
businesses or that are subject to related operating risks, the fund will be more
susceptible to negative events affecting those issuers.
Risks relating to
inflation-indexed securities. The value
of inflation-indexed fixed income securities generally fluctuates in response to
changes in real interest rates, which are in turn tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of
inflation-indexed securities. In contrast, if nominal interest rates increase at
a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed securities. The principal value of
inflation-indexed securities declines in periods of deflation, and holders of
such securities may experience a loss. Although the holders of U.S. TIPS
receive no less than the par value of the security at maturity, if the fund
purchases U.S. TIPS in the secondary market whose principal values have been
adjusted upward due to inflation since issuance, it may experience a loss if
there is a subsequent period of deflation. If inflation is lower than expected
during the period the fund holds an inflation-indexed security, the fund may
earn less on the security than on a conventional bond.
Any
increase in principal value caused by an increase in the index the
inflation-indexed securities are tied to is taxable in the year the increase
occurs, even though the fund will not receive cash representing the increase at
that time. As a result, the fund could be required at times to liquidate other
investments, including when it is not advantageous to do so, in order to satisfy
the distribution requirements applicable to regulated investment companies under
the Internal Revenue Code of 1986, as amended (the “Code”). See “Taxes” in the
SAI.
If
real interest rates rise (i.e., if interest rates rise for reasons other than
inflation, for example, due to changes in currency exchange rates), the value of
inflation-indexed securities held by the fund will decline. Moreover, because
the principal amount of inflation-indexed securities would be adjusted downward
during a period of deflation, the fund will be subject to deflation risk with
respect to its investments in these securities. Inflation-indexed securities are
tied to indices that are calculated based on rates of inflation for prior
periods. There can be no assurance that such indices will accurately measure the
actual rate of inflation in the prices of goods and services.
Sovereign debt
risk. Sovereign government and
supranational debt involve many of the risks of foreign and emerging markets
investments as well as the risk of debt moratorium, repudiation or
renegotiation, and the fund may be unable to enforce its rights against the
issuers. Sovereign debt risk is increased for emerging market issuers.
Trading issues
risk. Trading in shares of the fund on
NASDAQ may be halted due to market conditions or for reasons that, in the view
of NASDAQ, make trading in shares inadvisable. In addition, trading in shares on
NASDAQ is subject to trading halts caused by extraordinary market volatility
pursuant to NASDAQ’s “circuit breaker” rules. There can be no assurance that the
requirements of NASDAQ necessary to maintain the listing of the fund will
continue to be met or will remain unchanged.
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U.S. government
securities risk. The fund may hold U.S.
government securities that are not guaranteed or backed by the full faith and
credit of the U.S. government, such as those issued by Fannie Mae and Freddie
Mac. The maximum potential liability of the issuers of some U.S. government
obligations may greatly exceed their current resources, including any legal
right to support from the U.S. government. In addition, the events surrounding
the U.S. federal government debt ceiling and any resulting agreement (and
similar political, economic and other developments) could adversely affect the
fund’s ability to achieve its investment objective. For example, a downgrade of
the long-term sovereign credit rating of the U.S. could increase volatility in
both stock and bond markets, result in higher interest rates and lower Treasury
prices and increase the costs of all kinds of debt. These events and similar
events in other areas of the world could have significant adverse effects on the
economy generally and could result in significant adverse impacts on issuers of
securities held by the fund and the fund itself.
In
the past, the values of U.S. Government securities have been affected
substantially by increased demand for them around the world. Changes in the
demand for U.S. Government securities may occur at any time and may result in
increased volatility in the values of those securities.
Valuation
risk. Many factors may influence the
price at which the fund could sell any particular portfolio investment. The
sales price may well differ—higher or lower—from the fund’s last valuation, and
such differences could be significant, particularly for illiquid securities and
securities that trade in relatively thin markets and/or markets that experience
extreme volatility. These differences may increase significantly and affect fund
investments more broadly during periods of market volatility. If market
conditions make it difficult to value some investments, the fund may value these
investments using more subjective methods, such as fair value methodologies.
Valuation methodologies may be further impacted by technological issues and/or
errors by pricing vendors or their personnel. Authorized Participants who
purchase or redeem fund shares on days when the fund is holding fair-valued
securities may receive fewer or more shares, or lower or higher redemption
proceeds, than they would have received if the fund had not fair-valued
securities or had used a different valuation methodology. The value of non‑U.S.
securities, certain fixed income securities and currencies, as applicable, may
be materially affected by events after the close of the markets in which they
are traded, but before the fund determines its net asset value. The fund’s
ability to value its investments may be impacted by technological issues and/or
errors by pricing services or other third party service providers. The valuation
of the fund’s investments involves subjective judgment.
Volatility
risk. The value of the securities or
other assets in the fund’s portfolio may fluctuate, sometimes rapidly and
unpredictably. The value of a security or other asset may fluctuate due to
factors affecting markets generally or particular industries. The value of a
security may also be more volatile than the market as a whole. This volatility
may affect the fund’s net asset value. Securities or other assets in the fund’s
portfolio may be subject to price volatility and the prices may not be any less
volatile than the market as a whole and could be more volatile. Events or
financial circumstances affecting individual securities or sectors may increase
the volatility of the fund.
Warrants and rights
risk. Warrants and rights can provide a
greater potential for profit or loss than an equivalent investment in the
underlying security. Prices of warrants and rights do not necessarily move in
tandem with the prices of the underlying securities and therefore, are highly
volatile and speculative investments. They have no voting rights, pay no
dividends and have no rights with respect to the assets of the issuer other than
a purchase option. If a warrant or right held by the fund is not exercised by
the date of its expiration, the fund would lose the entire purchase price of the
warrant or right.
Please
note that there are other factors that could adversely affect your investment
and that could prevent the fund from achieving its investment objective. More
information about risks appears in the SAI. Before investing, you should
carefully consider the risks that you will assume.
Portfolio holdings
On
each business day, before the opening of regular trading on the fund’s primary
listing exchange, the fund will disclose on
www.franklintempleton.com/etfproducts (click on the name of the fund)
information about the fund’s portfolio holdings, including the identities and
quantities of such portfolio holdings, that will form the basis for the fund’s
calculation of its net asset value per share at the end of the business day. A
description of the fund’s policies and procedures with respect to the disclosure
of its portfolio holdings is available in the SAI.
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Western
Asset Total Return ETF |
More on fund management
Legg
Mason Partners Fund Advisor, LLC (“LMPFA” or the “manager”) is the fund’s
investment manager. LMPFA, with offices at 280 Park Avenue, New York,
New York 10017, also serves as the investment manager of other Legg
Mason-sponsored funds. LMPFA provides administrative and certain oversight
services to the fund. As of March 31, 2022, LMPFA’s total assets under
management were approximately $212.2 billion.
Western
Asset Management Company, LLC (“Western Asset”) provides the day‑to‑day
portfolio management of the fund as subadviser. Western Asset Management Company
Limited (“Western Asset London”), Western Asset Management Company Pte. Ltd.
(“Western Asset Singapore”) and Western Asset Management Company Ltd (“Western
Asset Japan” and, collectively with Western Asset London and Western Asset
Singapore, the “sub‑subadvisers”) serve as sub‑subadvisers to the fund.
References to “the subadviser” include the subadviser and each applicable
sub‑subadviser.
Western
Asset, established in 1971, has offices at 385 East Colorado Boulevard,
Pasadena, California 91101 and 620 Eighth Avenue, New York, New York 10018.
Western Asset London was founded in 1984 and has offices at 10 Exchange Square,
Primrose Street, London EC2A 2EN. Western Asset Japan was founded in 1991
and has offices at 36F Shin-Marunouchi Building, 5‑1 Marunouchi 1‑Chome
Chiyoda‑Ku, Tokyo 100‑6536, Japan. Western Asset Singapore was established
in 2000 and has offices at 1 George Street #23‑01, Singapore 049145.
Western
Asset London, Western Asset Japan and Western Asset Singapore provide certain
subadvisory services relating to currency transactions and investments in
non‑U.S. dollar-denominated securities and related foreign currency instruments.
Western Asset London generally manages global and non‑U.S. dollar fixed income
mandates, Western Asset Japan generally manages Japanese fixed income mandates,
and Western Asset Singapore generally manages Asian (other than Japan) fixed
income mandates. Each office provides services relating to relevant portions of
Western Asset’s broader portfolios as appropriate.
Western
Asset London, Western Asset Japan and Western Asset Singapore undertake
investment-related activities including investment management, research and
analysis, and securities settlement.
Western
Asset employs a team approach to investment management that utilizes relevant
staff in multiple offices around the world. Expertise from Western Asset
investment professionals in those offices add local sector investment experience
as well as the ability to trade in local markets. Although the investment
professionals at Western Asset London, Western Asset Japan, and Western Asset
Singapore are responsible for the management of the investments in their local
sectors, Western Asset provides overall supervision of their activities for the
fund to maintain a cohesive investment management approach.
Western
Asset, Western Asset London, Western Asset Japan and Western Asset Singapore act
as investment advisers to institutional accounts, such as corporate pension
plans, mutual funds and endowment funds. As of March 31, 2022, the total assets
under management of Western Asset and its supervised affiliates, including
Western Asset London, Western Asset Japan and Western Asset Singapore, were
approximately $444.4 billion.
LMPFA
pays Western Asset a portion of the management fee that it receives from the
fund. The fund does not pay any additional advisory or other fees for advisory
services provided by Western Asset, Western Asset London, Western Asset Japan or
Western Asset Singapore.
LMPFA,
Western Asset, Western Asset London, Western Asset Japan and Western Asset
Singapore are indirect, wholly-owned subsidiaries of Franklin Resources, Inc.
(“Franklin Resources”). Franklin Resources, whose principal executive offices
are at One Franklin Parkway, San Mateo, California 94403, is a global investment
management organization operating, together with its subsidiaries, as Franklin
Templeton. As of March 31, 2022, Franklin Templeton’s asset management
operations had aggregate assets under management of approximately $1.47
trillion.
Investment professionals
Primary
responsibility for the day‑to‑day portfolio management, development of
investment strategy, oversight and coordination of the fund lies with the
following investment professionals. The fund is managed by a broad team of
investment professionals. Senior members of the portfolio management team are
responsible for the development of investment strategy and oversight for the
fund and coordination of other relevant investment team members. They work
together with the broader Western Asset investment management team on portfolio
structure, duration weighting and term structure decisions.
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Investment
professional |
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Title and recent
biography |
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Investment
professional of the fund since |
S.
Kenneth Leech |
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Chief
Investment Officer and has been employed by Western Asset as an investment
professional for at least the past five years. |
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2018 |
John
Bellows |
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Portfolio
Manager/Research Analyst and has been employed by Western Asset as an
investment professional for at least the past five years. |
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2018 |
Mark
S. Lindbloom |
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Portfolio
Manager and has been employed by Western Asset as an investment
professional for at |
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2018 |
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Western Asset Total Return
ETF |
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Investment
professional |
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Title and recent
biography |
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Investment
professional of the fund since |
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least
the past five years. |
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Frederick
R. Marki |
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Portfolio
Manager and has been employed by Western Asset as an investment
professional for at least the past five years. |
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2018 |
Julien A.
Scholnick |
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Portfolio
Manager and has been employed by Western Asset as an investment
professional for at least the past five years. |
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2018 |
The
SAI provides information about the compensation of the investment professionals,
other accounts managed by the investment professionals and any fund shares held
by the investment professionals.
Management fee
Pursuant
to the management agreement and subject to the general supervision of the Board,
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 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 management agreement.
The
fund pays management fees at an annual rate as follows:
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Name of fund |
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Management fee |
Western
Asset Total Return ETF |
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0.49%
of average daily net assets |
For
the fiscal year ended December 31, 2021, and for the fiscal period
January 1, 2022 to March 31, 2022, the fund paid LMPFA an effective
management fee of 0.45% of the fund’s average daily net assets for management
services.
A
discussion regarding the basis for the Board’s approval of the fund’s management
agreement and subadvisory agreements is available in the fund’s Semi-Annual
Report for the period ended June 30, 2020.
Expense limitation
The
manager has agreed to waive fees and/or reimburse management fees so that the
ratio of total annual fund operating expenses will not exceed 0.45% (subject to
the same exclusions as the management agreement). This arrangement cannot be
terminated prior to July 31, 2023 without the Board of Trustees’ consent.
Additional information
The
fund enters into contractual arrangements with various parties, including, among
others, the fund’s manager and the subadviser, who provide services to the fund.
Shareholders are not parties to, or intended (or “third-party”) beneficiaries
of, those contractual arrangements.
This
Prospectus and the SAI provide information concerning the fund that you should
consider in determining whether to purchase shares of the fund. The fund may
make changes to this information from time to time. Neither this Prospectus nor
the SAI is intended to give rise to any contract rights or other rights in any
shareholder, other than rights conferred by federal or state securities laws.
Distribution
Franklin
Distributors, LLC (“Franklin Distributors”), an indirect, wholly-owned
broker/dealer subsidiary of Franklin Resources, located at 100 International
Drive, Baltimore, Maryland 21202, serves as the distributor of Creation Units
for the fund on an agency basis. Franklin Distributors does not maintain a
secondary market in the fund’s shares. Franklin Distributors has no role in
determining the fund’s policies or the securities that are purchased or sold by
the fund.
The
Board has adopted a distribution and service plan (“Plan”) pursuant to Rule
12b‑1 under the Investment Company Act of 1940, as amended (the “1940 Act”).
Under the Plan, the fund is authorized to pay distribution fees in connection
with the sale and distribution of its shares and pay service fees in connection
with the provision of ongoing services to shareholders of the fund and the
maintenance of shareholder accounts in an amount up to 0.25% of its average
daily net assets each year. No Rule 12b‑1 fees are currently paid by the fund,
and there are no current plans to impose these fees.
Additional payments
Franklin
Templeton or its affiliates make payments to broker-dealers, registered
investment advisers, banks or other intermediaries (together, “intermediaries”)
related to marketing activities and presentations, educational training
programs, conferences, the development of technology platforms and reporting
systems, or their making shares of the fund available to their customers
generally and in certain investment programs. Such
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30 |
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Western
Asset Total Return ETF |
payments,
which may be significant to the intermediary, are not made by the fund. Rather,
such payments are made by Franklin Templeton or its affiliates from their own
resources, which come directly or indirectly in part from fees paid by the fund.
A financial intermediary may make decisions about which investment options it
recommends or makes available, or the level of services provided, to its
customers based on the payments it is eligible to receive. Therefore, such
payments to an intermediary create conflicts of interest between the
intermediary and its customers and may cause the intermediary to recommend the
fund over another investment. More information regarding these payments is
contained in the fund’s SAI. Please contact your
salesperson or other investment professional for more information regarding any
such payments his or her firm may receive from Franklin Templeton or its
affiliates.
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Western Asset Total Return
ETF |
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Shareholder information
Additional shareholder information, including how to
buy and sell shares of the fund, is available free of charge by calling
toll-free: 1‑877‑721‑1926 or visiting our website at
www.franklintempleton.com/etfliterature.
Purchasing and selling
shares
Shares
of the fund may be acquired or redeemed directly from the fund only in Creation
Units or multiples thereof, as discussed in the “Creations and redemptions”
section of this Prospectus. Only an Authorized Participant may engage in
creation or redemption transactions directly with the fund. Once created, shares
of the fund generally trade in the secondary market in amounts less than a
Creation Unit.
Shares
of the fund are listed for trading on the secondary market on NASDAQ. Shares can
be bought and sold throughout the trading day like other publicly traded shares.
There is no minimum investment. Although shares are generally purchased and sold
in “round lots” of 100 shares, brokerage firms typically permit investors to
purchase or sell shares in smaller “odd lots” at no per‑share price
differential. The fund’s shares trade on NASDAQ as follows:
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Name of fund |
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Ticker symbol |
Western
Asset Total Return ETF |
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WBND |
Share prices are reported
in dollars and cents per share
Buying
or selling fund shares on an exchange or other secondary market involves two
types of costs that may apply to all securities transactions. When buying or
selling shares of the fund through a broker, you may incur a brokerage
commission and other charges. The commission is frequently a fixed amount and
may be a significant proportional cost for investors seeking to buy or sell
small amounts of shares. In addition, you may incur the cost of the “spread,”
that is, any difference between the bid price and the ask price. The spread
varies over time for shares of the fund based on the fund’s trading volume and
market liquidity, and is generally lower if the fund has high trading volume and
market liquidity, and higher if the fund has little trading volume and market
liquidity (which is often the case for funds that are newly launched or small in
size). The fund’s spread may also be impacted by the liquidity of the underlying
securities held by the fund, particularly for newly launched or smaller funds or
in instances of significant volatility of the underlying securities.
Authorized
Participants may acquire shares directly from the fund and may tender their
shares for redemption directly to the fund, at net asset value per share only in
Creation Units.
The
fund’s primary listing exchange is NASDAQ. NASDAQ is open for trading Monday
through Friday and is closed on weekends and the following holidays: New Year’s
Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day,
Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Section 12(d)(1)
of the 1940 Act restricts investments by investment companies in the securities
of other investment companies. Registered investment companies are permitted to
invest in the fund beyond the limits set forth in Section 12(d)(1), subject
to certain terms and conditions set forth in SEC rules or in exemptive relief as
applicable. In order for a registered investment company to invest in shares of
the fund beyond the limitations of Section 12(d)(1), the registered
investment company must generally enter into an agreement with the fund.
Frequent purchases and
redemptions of fund shares
The
Board has evaluated the risks of frequent purchases and redemptions of fund
shares (“market timing”) activities by the fund’s shareholders. The Board noted
that the fund’s shares can only be purchased and redeemed directly from the fund
in Creation Units by Authorized Participants and that the vast majority of
trading in the fund’s shares occurs on the secondary market. Because the
secondary market trades do not involve the fund directly, it is unlikely those
trades would cause many of the harmful effects of market timing, including
dilution, disruption of portfolio management, increases in the fund’s trading
costs and the realization of capital gains.
With
respect to trades directly with the fund, to the extent they are effected
in‑kind, those trades do not cause any of the harmful effects (as previously
noted) that may result from frequent cash trades. To the extent that the fund
permits or requires trades to be effected in whole or in part in cash, the Board
noted that those trades could result in dilution to the fund and increased
transaction costs, which could negatively impact the fund’s ability to achieve
its investment objective. However, the Board noted that direct trading by
Authorized Participants is critical to ensuring that the fund’s shares trade at
or close to net asset value. The fund also employs fair valuation pricing to
minimize potential dilution from market timing. The fund imposes transaction
fees on in‑kind purchases and redemptions of fund shares to cover the custodial
and other costs incurred by the fund in effecting in‑kind trades. These fees may
increase if an investor substitutes cash in part or in whole for securities,
reflecting the fact that the fund’s trading costs increase in those
circumstances. Given this structure, the Board determined that it is not
necessary to apply policies and procedures to the fund to detect and deter
market timing.
Book entry
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding shares of the fund and is recognized as the owner of all shares for
all purposes.
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Western
Asset Total Return ETF |
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all shares.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of stock certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book entry or “street name” form.
Fund share trading prices
The
trading prices of the fund’s shares in the secondary market generally differ
from the fund’s daily net asset value and are affected by market forces such as
the supply of and demand for ETF shares and underlying securities held by the
fund, economic conditions and other factors. Information regarding the intraday
value of shares of the fund, also known as the “intra‑day indicative value”
(“IIV”), is disseminated every 15 seconds throughout each trading day by the
national securities exchange on which the fund’s shares are listed or by market
data vendors or other information providers. The IIV is based on the current
market value of the securities and/or cash required to be deposited in exchange
for a Creation Unit but does not include a reduction for the fees, operating
expenses or transaction costs incurred by the fund. The IIV does not necessarily
reflect the precise composition of the current portfolio of securities held by
the fund at a particular point in time or the best possible valuation of the
current portfolio. Therefore, the IIV should not be viewed as a “real-time”
update of the fund’s net asset value, which is computed only once a day. The IIV
is generally determined by using both current market quotations and/or price
quotations obtained from broker-dealers and other market intermediaries that may
trade in the portfolio securities held by the fund. The quotations of certain
fund holdings may not be updated during U.S. trading hours if such holdings do
not trade in the United States and thus may not reflect the current fair value
of those securities. The fund is not involved in, or responsible for, the
calculation or dissemination of the IIV nor makes any representation or warranty
as to its accuracy. Further, the dissemination of the fund’s IIV is not a
regulatory requirement for the fund or the exchange on which the fund’s shares
are listed, and the availability of this information may be discontinued
(without prior notice) at a future time.
Calculation of net asset
value
The
fund’s net asset value per share is the value of its assets minus its
liabilities divided by the number of shares outstanding.
The
fund calculates its net asset value every day the New York Stock Exchange (the
“NYSE”) is open. The fund generally values its securities and other assets and
calculates its net asset value as of the scheduled close of regular trading on
the NYSE, normally at 4:00 p.m. (Eastern time). If the NYSE closes at a time
other than the scheduled closing time, the fund will calculate its net asset
value as of the scheduled closing time. The NYSE is closed on certain holidays
listed in the SAI.
Valuation
of the fund’s securities and other assets is performed in accordance with
procedures approved by the Board. Under the procedures, assets are valued as
follows:
• |
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Equity
securities and certain derivative instruments that are traded on an
exchange are valued at the closing price (which may be reported at a
different time than the time at which the fund’s NAV is calculated) or, if
that price is unavailable or deemed by the manager not representative of
market value, the last sale price. Where a security is traded on more than
one exchange (as is often the case overseas), the security is generally
valued at the price on the exchange considered by the manager to be the
primary exchange. In the case of securities not traded on an exchange, or
if exchange prices are not otherwise available, the prices are typically
determined by independent third party pricing services that use a variety
of techniques and methodologies. |
• |
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The
valuations for fixed income 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 fair valuation techniques and methodologies.
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• |
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The
valuations of securities traded on foreign markets and certain fixed
income securities will generally be based on prices determined as of the
earlier closing time of the markets on which they primarily trade, unless
a significant event has occurred. 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). Foreign markets are open for trading on weekends and other days
when the fund does not price its shares. Therefore, the value of the
fund’s shares may change on days when you will not be able to purchase or
sell the fund’s shares. |
• |
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Investments
in ETFs and closed‑end funds listed on an exchange are valued at the
closing sale or official closing price on that exchange. Investments in
open‑end funds other than ETFs are valued at the net asset value per share
of the class of the underlying fund held by the fund as determined on each
business day. |
• |
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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. When such prices or quotations
are not available, or when the manager believes that they are unreliable,
the manager may price securities using fair value procedures. These
procedures permit, among other things, the use of a formula or other
method that takes into consideration market indices, yield curves and
other specific adjustments to determine fair value. Fair value of a
security is the amount, as determined by the manager in good faith, that
the fund might reasonably expect to receive upon a current sale of the
security. The fund may also use fair value procedures if the manager
determines that a significant event has occurred between the time at which
a market price is determined and the time at which the fund’s net asset
value is calculated. |
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Western Asset Total Return
ETF |
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Many
factors may influence the price at which the fund could sell any particular
portfolio investment. The sales price may well differ—higher or lower—from the
fund’s last valuation, and such differences could be significant, particularly
for securities that trade in relatively thin markets and/or markets that
experience extreme volatility. Moreover, valuing securities using fair value
methodologies involves greater reliance on judgment than valuing securities
based on market quotations. A fund that uses fair value methodologies may value
those securities higher or lower than another fund using market quotations or
its own fair value methodologies to price the same securities. There can be no
assurance that a fund could obtain the value assigned to a security if it were
to sell the security at approximately the time at which the fund determines its
net asset value.
As
of September 8, 2022, these procedures designate the manager to
perform the determination of fair value. The manager generally uses
independent third party pricing services subject to appropriate
oversight.
Premium/Discount
Information
Information
regarding how often the shares of the fund traded on the applicable exchange at
a price above (at a premium) or below (at a discount) the NAV of the fund for
the most recently completed calendar year, and the most recently completed
calendar quarters since that year, can be found at
www.franklintempleton.com/etfproducts (select fund).
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Western
Asset Total Return ETF |
Dividends, other
distributions and taxes
Dividends and other
distributions
The
fund pays dividends from substantially all of its net investment income monthly.
Shares will generally begin to earn dividends on the settlement date of
purchase. The fund generally distributes capital gain, if any, once a year,
typically in December. The fund may pay additional distributions and dividends
in order to avoid a federal tax.
Dividends
and other distributions on shares of the fund are distributed on a pro rata
basis to beneficial owners of such shares. Dividend payments are made through
DTC participants and indirect participants to beneficial owners then of record
with proceeds received from the fund.
The
Board reserves the right to revise the dividend policy or postpone the payment
of dividends if warranted in the Board’s judgment due to unusual circumstances.
Reinvestment of
distributions
Distributions
are paid in cash. No dividend reinvestment service is provided by the fund.
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service for use by beneficial owners of the fund for reinvestment of their
dividend distributions. Beneficial owners should contact their broker to
determine the availability and costs of the service and the details of
participation therein. Brokers may require beneficial owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole shares of the fund purchased in the secondary
market.
Taxes
The
following discussion is very general, applies only to shareholders who are U.S.
persons, and does not address shareholders subject to special rules, such as
those who hold fund shares through an IRA, 401(k) plan or other tax‑advantaged
account. Except as specifically noted, the discussion is limited to federal
income tax matters, and does not address state, local, foreign or non‑income
taxes. Further information regarding taxes, including certain federal income tax
considerations relevant to non‑U.S. persons, is included in the SAI. Because
each shareholder’s circumstances are different and special tax rules may apply,
you should consult your tax adviser about federal, state, local and/or foreign
tax considerations that may be relevant to your particular situation.
In
general, selling shares and receiving dividends and distributions are taxable
events. Distributions attributable to short-term capital gains are taxable to
you as ordinary income. Distributions attributable to qualified dividend income
received by the fund, if any, may be eligible to be taxed to noncorporate
shareholders at the reduced rates applicable to long-term capital gain if
certain requirements are satisfied. Distributions of net capital gain reported
by the fund as capital gain dividends are taxable to you as long-term capital
gain regardless of how long you have owned your shares. Noncorporate
shareholders ordinarily pay tax at reduced rates on long-term capital gain.
If
the fund redeems Creation Units in cash, it may recognize more capital gains
than it will if it redeems Creation Units in‑kind. If the fund realizes capital
gains in excess of realized capital losses in any fiscal year, it generally
expects to make capital gain distributions. You may receive distributions that
are attributable to appreciation of portfolio securities that happened before
you made your investment but had not been realized at the time you made your
investment, or that are attributable to capital gains or other income that,
although realized by the fund, had not yet been distributed at the time you made
your investment. Unless you purchase shares through a tax‑advantaged account,
these distributions will be taxable to you even though they economically
represent a return of a portion of your investment. You may want to avoid buying
shares when the fund is about to declare a dividend or capital gain
distribution. You should consult your tax adviser before buying shares no matter
when you are investing.
A
Medicare contribution tax is imposed at the rate of 3.8% on all or a portion of
net investment income of U.S. individuals if their income exceeds specified
thresholds, and on all or a portion of undistributed net investment income of
certain estates and trusts. Net investment income generally includes for this
purpose dividends and capital gain distributions paid by the fund and gain on
the redemption, sale or exchange of fund shares.
A
dividend declared by the fund in October, November or December and paid during
January of the following year will, in certain circumstances, be treated as paid
on December 31 for tax purposes.
If
the fund meets certain requirements with respect to its holdings, it may elect
to “pass through” to shareholders foreign taxes that it pays, in which case each
shareholder will include the amount of such taxes in computing gross income, but
will be eligible to claim a credit or deduction for such taxes, subject to
generally applicable limitations on such deductions and credits. If the fund
does not so elect, the foreign taxes paid or withheld will nonetheless reduce
the fund’s taxable income. In addition, the fund’s investment in certain foreign
securities, foreign currencies or foreign currency derivatives may affect the
amount, timing, and character of fund distributions to shareholders.
Capital
gain or loss realized upon a sale of fund shares is generally treated as a
long-term gain or loss if the shares have been held for more than one year. Any
capital gain or loss realized upon a sale of fund shares held for one year or
less is generally treated as short-term gain or loss, except that any capital
loss on the sale of shares held for six months or less is treated as long-term
capital loss to the extent that capital gain dividends were paid with respect to
such shares.
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Western Asset Total Return
ETF |
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By
law, if you do not provide your proper taxpayer identification number and
certain required certifications, you may be subject to backup withholding on any
distributions of income, captial gains or proceeds from the sale of your shares.
Withholding is also imposed if the IRS requires it. When whithholding is
required, the amount will be 24% of any distributions or proceeds paid.
Fund
distributions and gains from the sale of your fund shares generally are subject
to state and local taxes.
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36 |
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Western
Asset Total Return ETF |
Creations and redemptions
Prior
to trading in the secondary market, shares of the fund are “created” at NAV by
market makers, large investors and institutions only in block‑size Creation
Units or multiples thereof. Each “creator” or “Authorized Participant” enters
into an authorized participant agreement with Franklin Distributors, the fund’s
distributor. Only an Authorized Participant may create or redeem Creation Units
directly with the fund.
The
fund may issue or redeem Creation Units in return for a specified amount of cash
or a designated portfolio of securities and/or cash that the fund specifies each
day. To the extent cash is used, an Authorized Participant must transfer cash in
an amount equal to the value of the Creation Unit(s) purchased and the
applicable transaction fee. An Authorized Participant also may effect a creation
transaction by depositing into the fund a designated portfolio of securities
(including any portion of such securities for which cash may be substituted) and
a specified amount of cash approximating the holdings of the fund in exchange
for a specified number of Creation Units (a “Creation Basket”). The composition
of each Creation Basket will be determined in accordance with board-approved
policies and procedures applicable to the construction of creation and
redemption baskets, and subject to acceptance by Franklin Distributors. Creation
and redemption baskets may differ and the fund will accept “custom baskets.”
More information regarding custom baskets is contained in the fund’s SAI.
Redemption
proceeds will be paid in cash or in kind. If redemption proceeds are paid in
kind, shares will be redeemed in Creation Units for a designated portfolio of
securities (including any portion of such securities for which cash may be
substituted) held by the fund (“Fund Securities”) and a specified amount of
cash. The composition of redemption proceeds will be determined in accordance
with board-approved policies and procedures applicable to the construction of
creation and redemption baskets. Except when aggregated in Creation Units,
shares are not redeemable by the fund.
The
prices at which creations and redemptions occur are based on the next
calculation of net asset value after a creation or redemption order is received
in an acceptable form under the authorized participant agreement.
In
the event of a system failure or other interruption, including disruptions at
market makers or Authorized Participants, orders to purchase or redeem Creation
Units either may not be executed according to the fund’s instructions or may not
be executed at all, or the fund may not be able to place or change orders.
To
the extent the fund engages in in‑kind transactions, the fund intends to comply
with the U.S. federal securities laws in accepting securities for deposit and
satisfying redemptions with redemption securities by, among other means,
assuring that any securities accepted for deposit and any securities used to
satisfy redemption requests will be sold in transactions that would be exempt
from registration under the Securities Act of 1933 (the “1933 Act”). Further, an
Authorized Participant that is not a “qualified institutional buyer,” as such
term is defined in Rule 144A under the 1933 Act, will not be able to receive
restricted securities eligible for resale under Rule 144A.
Information
about the procedures regarding creation and redemption of Creation Units
(including the cut‑off times for receipt of creation and redemption orders) is
included in the fund’s SAI.
Because
new shares may be created and issued on an ongoing basis, at any point during
the life of the fund a “distribution,” as such term is used in the 1933 Act, may
be occurring. Broker-dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner that could render them
statutory underwriters subject to the prospectus delivery and liability
provisions of the 1933 Act. Any determination of whether one is an underwriter
must take into account all the relevant facts and circumstances of each
particular case.
Broker-dealers
should also note that dealers who are not “underwriters” but are participating
in a distribution (as contrasted to ordinary secondary transactions), and thus
dealing with shares that are part of an “unsold allotment” within the meaning of
Section 4(a)(3)(C) of the 1933 Act, would be unable to take advantage of
the prospectus delivery exemption provided by Section 4(a)(3) of the 1933
Act. For delivery of prospectuses to exchange members, the prospectus delivery
mechanism of Rule 153 under the 1933 Act is available only with respect to
transactions on a national securities exchange.
Costs associated
with creations and redemptions.
Authorized Participants are charged standard creation and redemption transaction
fees to offset transfer and other transaction costs associated with the issuance
and redemption of Creation Units. The standard creation and redemption
transaction fees are set forth in the table below. The standard creation
transaction fee is charged to the Authorized Participant on the day such
Authorized Participant creates a Creation Unit, and is the same regardless of
the number of Creation Units purchased by the Authorized Participant on the
applicable business day. Similarly, the standard redemption transaction fee is
charged to the Authorized Participant on the day such Authorized Participant
redeems a Creation Unit, and is the same regardless of the number of Creation
Units redeemed by the Authorized Participant on the applicable business day.
Creations and redemptions for cash (when cash creations and redemptions (in
whole or in part) are available or specified) are also subject to an additional
charge (as shown in the table below). This charge is intended to compensate for
brokerage, tax, foreign exchange, execution, market impact and other costs and
expenses related to cash transactions. Investors who use the services of a
broker or other financial intermediary to acquire or dispose of fund shares may
pay fees for such services.
The
following table shows, as of March 31, 2022, the standard creation and
redemption transaction fees, the additional charge for creations and the maximum
additional charge for redemptions (as described above):
|
|
|
|
|
|
|
Western Asset Total Return
ETF |
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
Standard Creation/ Redemption Transaction Fee ($) |
|
Additional Charge
for Creations* (%) |
|
Maximum Additional Charge for Redemptions** (%) |
Western
Asset Total Return ETF |
|
100 |
|
2.0 |
|
2.0 |
* |
|
This amount, reflected
as a percentage of the NAV per Creation Unit, generally will be equal to
the costs and expenses incurred by a fund in connection with such cash
transactions and is not subject to a maximum limit. |
** |
|
As a percentage of the
NAV per Creation Unit inclusive of the standard redemption transaction
fee. |
|
|
|
|
|
38 |
|
|
|
Western
Asset Total Return ETF |
Financial highlights
The
financial highlights table is intended to help you understand the performance of
the fund for the past five years, unless otherwise noted. Total return
represents the rate that a shareholder would have earned (or lost) on a fund
share assuming reinvestment of all dividends and distributions. Unless otherwise
noted, this information has been audited by the fund’s independent registered
public accounting firm, PricewaterhouseCoopers LLP, whose report, along with the
fund’s financial statements, is incorporated by reference into the fund’s SAI
(see back cover) and is included in the fund’s annual report. The fund’s annual
report is available upon request by calling toll-free 1‑877‑721‑1926 or via the
following hyperlink:
(
https://www.sec.gov/Archives/edgar/data/1645194/000119312522165683/d332601dncsr.htm).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of beneficial interest outstanding
throughout each year ended March 31, unless otherwise
noted: |
|
|
|
20221,2 |
|
|
20211,3 |
|
|
20201,3 |
|
|
20191,3 |
|
|
20181,4 |
|
|
|
|
|
|
|
Net asset value,
beginning of period |
|
|
$26.22 |
|
|
|
$28.19 |
|
|
|
$26.88 |
|
|
|
$25.16 |
|
|
|
$25.00 |
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income |
|
|
0.16 |
|
|
|
0.66 |
|
|
|
0.61 |
|
|
|
0.82 |
|
|
|
0.20 |
|
Net
realized and unrealized gain (loss) |
|
|
(3.37) |
|
|
|
(1.49) |
|
|
|
2.07 |
|
|
|
2.45 |
|
|
|
0.10 |
|
Total income
(loss) from operations |
|
|
(3.21) |
|
|
|
(0.83) |
|
|
|
2.68 |
|
|
|
3.27 |
|
|
|
0.30 |
|
|
|
|
|
|
|
Less distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income |
|
|
(0.13) |
|
|
|
(0.87) |
|
|
|
(0.84) |
|
|
|
(0.90) |
|
|
|
(0.14) |
|
Net
realized gains |
|
|
— |
|
|
|
(0.27) |
|
|
|
(0.53) |
|
|
|
(0.65) |
|
|
|
— |
|
Total
distributions |
|
|
(0.13) |
|
|
|
(1.14) |
|
|
|
(1.37) |
|
|
|
(1.55) |
|
|
|
(0.14) |
|
|
|
|
|
|
|
Net asset value,
end of period |
|
|
$22.88 |
|
|
|
$26.22 |
|
|
|
$28.19 |
|
|
|
$26.88 |
|
|
|
$25.16 |
|
Total return,
based on NAV5 |
|
|
(12.28) |
% |
|
|
(2.98) |
% |
|
|
10.12 |
% |
|
|
13.19 |
% |
|
|
1.19 |
% |
|
|
|
|
|
|
Net assets, end of
period (000s) |
|
|
$113,276 |
|
|
|
$124,567 |
|
|
|
$140,942 |
|
|
|
$107,525 |
|
|
|
$25,162 |
|
|
|
|
|
|
|
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
expenses6 |
|
|
0.49 |
%7 |
|
|
0.49 |
% |
|
|
0.49 |
% |
|
|
0.49 |
% |
|
|
0.49 |
%7 |
Net
expenses6,8 |
|
|
0.45 |
7 |
|
|
0.45 |
|
|
|
0.45 |
|
|
|
0.45 |
|
|
|
0.45 |
7 |
Net
investment income |
|
|
2.62 |
7 |
|
|
2.43 |
|
|
|
2.19 |
|
|
|
3.09 |
|
|
|
3.33 |
7 |
|
|
|
|
|
|
Portfolio turnover
rate9 |
|
|
10 |
% |
|
|
65 |
% |
|
|
115 |
% |
|
|
80 |
% |
|
|
18 |
% |
1 |
Per
share amounts have been calculated using the average shares method.
|
2 |
For
the period January 1, 2022 through March 31, 2022.
|
3 |
For
the Year Ended December 31. |
4 |
For
the period October 3, 2018 (inception date) to December 31,
2018. |
5 |
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. |
6 |
As
a result of an expense limitation arrangement, the ratio of total annual
fund operating expenses, other than 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, to the average net assets did not exceed
0.45%. This expense limitation arrangement cannot be terminated prior to
May 1, 2022 without the Board of Trustees’ consent.
|
8 |
Reflects
fee waivers and/or expense reimbursements. |
9 |
Excluding
mortgage dollar rolls transactions. If mortgage dollar roll transactions
had been included, the portfolio turnover rate would have been 16% for the
period ended March 31, 2022 and 103%, 193%, 285% and 97% for the
years ended December 31, 2021, 2020, 2019 and the period ended
December 31, 2018, respectively. |
|
|
|
Western Asset Total Return
ETF |
|
39 |
Western Asset
Total Return ETF
You
may visit www.franklintempleton.com/etfliterature for a free copy of a
Prospectus, Statement of Additional Information (“SAI”) or an Annual or
Semi-Annual Report.
Shareholder
reports Additional information about the
fund’s investments is available in the fund’s Annual and Semi-Annual Reports to
shareholders. In the fund’s Annual Report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
fund’s performance during its last fiscal period. The independent registered
public accounting firm’s report and financial statements in the fund’s Annual
Report are incorporated by reference into (are legally a part of) this
Prospectus.
The
fund sends only one report to a household if more than one account has the same
last name and same address. Contact your Service Agent or the fund if you do not
want this policy to apply to you.
Statement of
additional information The SAI provides
more detailed information about the fund and is incorporated by reference into
(is legally a part of) this Prospectus.
You
can make inquiries about the fund or obtain shareholder reports or the SAI
(without charge) by contacting your Service Agent, by calling the fund at
1‑877‑721‑1926, or by writing to the fund at BNY Mellon, Attn: Legg Mason Funds,
4400 Computer Drive, Westborough, MA 01581.
Reports
and other information about the fund are available on the EDGAR Database on the
Securities and Exchange Commission’s Internet site at
http://www.sec.gov. Copies of this information may be obtained for a
duplicating fee by electronic request at the following E‑mail address:
[email protected].
If
someone makes a statement about the fund that is not in this Prospectus, you
should not rely upon that information. Neither the fund nor the Distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(Investment
Company Act
file
no. 811-23096)