Legg Mason ETF Investment Trust
Prospectus
August 1,
2023
ROYCE
QUANT SMALL‑CAP QUALITY VALUE ETF
NASDAQ (Ticker
Symbol): SQLV
The
Securities and Exchange 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 |
Royce
Quant Small‑Cap Quality Value ETF (the “fund”) seeks to achieve long-term growth
of capital.
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
(%) |
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(expenses that you pay each
year as a percentage of the value of your
investment) |
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Management
fees |
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0.60 |
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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0.60 |
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 $10,000 in the fund for the time periods indicated
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Your
investment has a 5% return each year and the fund’s operating expenses
remain the same (except that any applicable fee waiver or expense
reimbursement is reflected only through its expiration date)
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You
may also incur usual and customary brokerage commissions and other charges when
buying or selling shares of the fund, which are not reflected in the example.
Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
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Number of years you own
your shares ($) |
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1 year |
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3 years |
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5 years |
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10 years |
Royce
Quant Small‑Cap Quality Value ETF |
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61 |
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192 |
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335 |
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750 |
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 most
recent fiscal year, the fund’s portfolio turnover rate was 51% of the average value of its
portfolio.
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2 |
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Royce
Quant Small-Cap Quality Value ETF |
Principal investment
strategies
The
fund primarily invests in equity securities of small-capitalization companies
that are traded in the United States and meet certain criteria using a
proprietary methodology created by the fund’s subadviser, Royce &
Associates, LP (Royce & Associates, LP primarily conducts its business
under the name Royce Investment Partners (“Royce” or the “subadviser”)). Under
normal market conditions, the fund invests at least 80% of its net assets, plus
borrowings for investment purposes, if any, in equity securities of
small-capitalization companies or other instruments with similar
characteristics. Small-capitalization companies are U.S.-headquartered companies
listed on U.S. exchanges with market capitalizations that are between the 1001st
and 3000th largest companies based on descending market capitalization at the
time of investment. As of March 31, 2023, the universe was comprised of
companies with capitalizations ranging from $50 million to
$3.9 billion.
Royce
uses a quantitative investment process that seeks to identify stocks with
lower than average valuation, higher than average profitability, and higher than
average debt coverage (i.e., available cash flow to pay current debt
obligations) as compared with other stocks included in the investment universe
while maintaining a comparable risk profile. The fund’s investment universe
includes common stocks of U.S.-headquartered companies listed on U.S. exchanges,
and excludes royalty companies, American depositary receipts and global
depositary receipts, master limited partnerships, stocks with a share price less
than or equal to $1.00 at the time of purchase, and stocks deemed by Royce to
have insufficient trading volume. The universe is then refined to include stocks
with market capitalizations that are between the 1001st and 3000th largest
companies based on descending market capitalization at the time of investment.
From that universe, real estate investment trusts are excluded.
From
the universe of eligible companies, Royce selects securities using its
proprietary, rules-based multi-factor scoring system, with all factors described
herein measured and determined by Royce, in an effort to identify companies
which combine favorable attributes of quality and value, as defined by Royce,
compared with companies within the same market sector. Royce ranks the
securities in the investment universe within each sector according to the
quality and value factors, which yields a model score that determines the
securities that are selected for inclusion in the fund’s portfolio. Sector
allocations are determined by the number of companies in each sector. For
quality factors, Royce focuses on a company’s profitability (as measured by
return on invested capital), the historic stability of its profitability (as
measured by variance of return on assets), and debt coverage (as measured by
cash flow relative to debt). The debt coverage ratio is used in an attempt to
limit the fund’s exposure to companies that Royce believes may have higher
financial risk. For value factors, Royce focuses on the free cash flow of a
company (i.e., net cash from operating activities minus capital expenditures)
compared to its enterprise value. Enterprise value is determined by adding the
company’s outstanding debt (including preferred stock and minority interests) to
the company’s market capitalization and then subtracting cash and cash
equivalents from the total value.
After
the securities are scored by quality and value factors, each security’s momentum
score, which is based on the price performance over the most recent 30 days, is
used to determine the timing of when the security may be bought or sold for the
fund (i.e., the momentum score is used by Royce to try to determine the
opportune time to buy or sell). For example, if a security selected for
inclusion in the fund’s portfolio according to the quality and value factors has
exhibited high momentum, Royce may temporarily delay purchasing such security.
Conversely, if a security selected for removal from the fund’s portfolio
according to the quality and value factors has exhibited high momentum, Royce
will typically sell such security as soon as is practicable.
Position
weights of securities within the fund’s portfolio are determined by Royce by
calculating a composite score based on company fundamentals that include book
value, revenue, free cash flow, and dividends paid. By using fundamental factors
to weight stocks rather than market capitalization, Royce seeks to have lower
exposure to overvalued companies while still maintaining broad diversification
within the fund’s portfolio. Royce generally seeks to limit the weight of
individual securities in the fund’s portfolio to no more than 3% of its net
assets and to limit sector exposures within the portfolio to no more than 25% of
its net assets, each measured at time of investment. Although the fund primarily
invests in equity securities of small-capitalization companies, the fund may
continue to hold or, in some cases, build positions in companies with higher
market capitalizations.
Royce’s
proprietary, rules-based multi-factor scoring system may incorporate information
and data obtained from third-party providers as supplementary to Royce’s own
proprietary research and analysis. Royce has the right to change the third-party
service providers that support this process at any time.
Royce
may seek to sell a security if: (i) the security no longer meets its
quality and value criteria; (ii) the security reaches its position size
limit in the fund’s portfolio; (iii) there are adverse policy changes that
could affect the security’s outlook; or (iv) better investment
opportunities become available. The fund may engage in active and
frequent trading to achieve its investment objective, resulting in
high portfolio turnover.
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 summary description of
certain risks of investing in 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, armed conflicts, economic sanctions and countermeasures
in response to sanctions, major cybersecurity events, investor sentiment, the
global and domestic effects of a pandemic, and other
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Royce Quant Small-Cap Quality Value
ETF |
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3 |
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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, wars, 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. Other securities or markets could be similarly affected by
past or future geopolitical or other events or conditions. Furthermore, events
involving limited liquidity, defaults, non‑performance or other adverse
developments that affect one industry, such as the financial services industry,
or concerns or rumors about any events of these kinds, have in the past and may
in the future lead to market-wide liquidity problems, may spread to other
industries, and could negatively affect the value and liquidity of the fund’s
investments.
The
fallout from the COVID‑19 pandemic and its subsequent variants, and the
long-term impact on economies, markets, industries and individual issuers, are
not known. Some sectors of the economy and individual issuers have experienced
or may experience particularly large losses. Periods of extreme volatility in
the financial markets; reduced liquidity of many instruments; and disruptions to
supply chains, consumer demand and employee availability, may continue for some
time. 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 may not work as intended, and have resulted in a large expansion of
government deficits and debt, the long term consequences of which are not known.
In addition, the COVID‑19 pandemic, and measures taken to mitigate its effects,
could result in disruptions to the services provided to the fund by its service
providers.
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, trust certificates,
limited partnership interests and shares of other investment companies,
including exchange-traded funds. 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.
Volatility
risk. The market prices of the
securities or other assets in the fund’s portfolio may fluctuate, sometimes
rapidly and unpredictably. The price of a security may fluctuate due to factors
affecting markets generally or particular industries. The market price of a
security or other asset 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.
Asset class
risk. Securities in the fund’s portfolio
may underperform in comparison to the general financial markets, a particular
financial market or other asset classes.
Small capitalization
company risk. The fund will be exposed
to additional risks as a result of its investments in the securities of small
capitalization companies. Small capitalization companies may fall out of favor
with investors; may have limited product lines, operating histories, markets or
financial resources; or may be dependent upon a limited management group. The
prices of securities of small capitalization companies generally are more
volatile than those of large capitalization companies and are more likely to be
adversely affected than large capitalization companies by changes in earnings
results and investor expectations or poor economic or market conditions,
including those experienced during a recession. Securities of small
capitalization companies may underperform large capitalization companies, may be
harder to sell at times or at prices the portfolio managers believe appropriate
and may have greater potential for losses.
Portfolio management
risk. The value of your investment may
decrease if the subadviser’s judgment about the attractiveness or value of, or
market trends affecting, a particular security, industry, sector or region, or
about market movements, 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.
Quantitative model
risk. The fund, LMPFA, and Royce cannot
offer any assurance that the quantitative methodology used to determine the
composition of the fund’s portfolio will achieve its intended results or
maximize returns or minimize risks. When a model or data used in managing the
fund contains an error, is incorrect, or incomplete, any investment decision
made in reliance on the model or data may not produce the desired results and
the fund may realize losses. Royce may use information and data from third-party
providers, which may be incomplete, inaccurate or unavailable, and different
third-party providers may provide different or inconsistent information and
data.
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 involves subjective judgment.
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Royce
Quant Small-Cap Quality Value ETF |
Quality stocks
risk. The fund invests in stocks that
Royce believes are quality stocks based on a number of factors. There is no
guarantee that the past performance of these stocks will continue or that Royce
will be successful in evaluating individual stocks. Companies that issue these
stocks may experience lower than expected profitability or may experience
negative growth, as well as increased leverage, resulting in lower than expected
or negative returns to fund shareholders. Many factors can affect a stock’s
quality and performance, and the impact of these factors on a stock or its price
can be difficult to predict.
Value investing
risk. The value approach to investing
involves the risk that stocks may remain undervalued for long periods,
undervaluation may become more severe, or perceived undervaluation may actually
represent intrinsic value. Value stocks may underperform the overall equity
market for an extended period while the market favors growth stocks. A value
stock may not increase in price as anticipated by Royce if other investors fail
to recognize the company’s value and bid up the price or the factors that Royce
believes will increase the price of the security do not occur or do not have the
anticipated effect. Value stocks may go in and out of favor over time and Royce
may sell a security prior to the security realizing a gain in connection with
changed market perception regarding the value of the security.
Issuer
risk. The market price of a security can
go up or down more than the market as a whole and can perform differently from
the value of the market as a whole, due to factors specifically relating to the
security’s issuer, such as disappointing earnings reports by the issuer,
unsuccessful products or services, loss of major customers, changes in
management, corporate actions, negative perception in the marketplace, or major
litigation or changes in government regulations affecting the issuer or the
competitive environment. An individual security may also be affected by factors
relating to the industry or sector of the issuer. The fund may experience a
substantial or complete loss on an individual security. A change in financial
condition or other event affecting a single issuer may adversely impact the
industry or sector of the issuer or securities markets as a whole.
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. 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).
Small fund
risk. When the fund’s size is
small, the fund may experience low trading volume and wide bid/ask spreads. In
addition, the fund may face the risk of being delisted if the fund does not meet
certain conditions of the listing exchange. If the fund does not attract
additional assets, the fund’s expenses will continue to be spread over a small
asset base.
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.
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.
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.
Portfolio turnover
risk. The subadviser will sell a
security when it believes it is appropriate to do so, regardless of how long the
fund has held the security. The fund’s portfolio turnover rate may exceed 100%
per year because of the anticipated use of certain investment strategies. The
rate of portfolio turnover will not be a limiting factor for the subadviser in
making decisions on when to buy or sell securities. High turnover will increase
the fund’s transaction costs and may increase your tax liability if the
transactions result in capital gains.
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Royce Quant Small-Cap Quality Value
ETF |
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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 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.
Cybersecurity
risk. Cybersecurity incidents, whether
intentionally caused by third parties or otherwise, 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, redeeming or exchanging shares,
receiving distributions or receiving timely information regarding the fund or
their investment in the fund. 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, the manager, and/or the subadviser.
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.
These
and other risks are discussed in more detail in the Prospectus or in the
Statement of Additional Information.
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Royce
Quant Small-Cap Quality Value 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.
Prior
to May 10, 2022, the fund operated as an index based ETF that sought to
track the investment results of the Royce Small‑Cap Quality Value Index.
Best
Quarter (12/31/2020): 31.89 Worst
Quarter (03/31/2020): (35.79)
The
year‑to‑date return as of the
most recent calendar quarter, which ended June 30, 2023, was
7.57
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Average annual total returns
(%) |
(for periods ended
December 31, 2022) |
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1 year |
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5 years |
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Since inception |
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Inception date |
Return
before taxes |
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(12.85) |
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6.24 |
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7.20 |
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07/12/2017 |
Return
after taxes on distributions |
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(13.10) |
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5.92 |
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6.89 |
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Return
after taxes on distributions and sale of fund shares |
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(7.43) |
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4.84 |
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5.63 |
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Russell
2000 Index (reflects no deduction for fees, expenses or taxes) |
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(20.44) |
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4.13 |
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5.32 |
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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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Royce Quant Small-Cap Quality Value
ETF |
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Management
Investment
manager: Legg Mason Partners Fund
Advisor, LLC (“LMPFA”)
Subadviser: Royce & Associates, LP (Royce &
Associates, LP primarily conducts its business under the name Royce Investment
Partners (“Royce” or the “subadviser”))
Portfolio
managers: Primary responsibility for the
day‑to‑day management of the fund lies with the following portfolio managers.
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Portfolio
manager |
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Title |
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Portfolio manager
of the fund since |
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George
Necakov, CFA |
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Portfolio
Manager |
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2017 |
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Michael
Connors |
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Assistant
Portfolio Manager |
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2017 |
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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 designated portfolio of
securities (and an amount of cash) that the fund specifies each day.
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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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 achieve long-term growth of capital.
Principal investment
strategies
The
fund primarily invests in equity securities of small-capitalization companies
that are traded in the United States and meet certain criteria using a
proprietary methodology created by Royce. Under normal market conditions, the
fund invests at least 80% of its net assets, plus borrowings for investment
purposes, if any, in equity securities of small-capitalization companies or
other instruments with similar characteristics. Small-capitalization companies
are U.S.-headquartered companies listed on U.S. exchanges with market
capitalizations that are between the 1001st and 3000th largest companies based
on descending market capitalization at the time of investment. As of
March 31, 2023, the universe was comprised of companies with
capitalizations ranging from $50 million to $3.9 billion.
Royce
uses a quantitative investment process that seeks to identify stocks with
lower than average valuation, higher than average profitability, and higher than
average debt coverage (i.e., available cash flow to pay current debt
obligations) as compared with other stocks included in the investment universe
while maintaining a comparable risk profile. The fund’s investment universe
includes common stocks of U.S.-headquartered companies listed on U.S. exchanges,
and excludes royalty companies, American depositary receipts and global
depositary receipts, master limited partnerships, stocks with a share price less
than or equal to $1.00 at the time of purchase, and stocks deemed by Royce to
have insufficient trading volume. The universe is then refined to include stocks
with market capitalizations that are between the 1001st and 3000th largest
companies based on descending market capitalization at the time of investment.
From that universe, real estate investment trusts are excluded.
From
the universe of eligible companies, Royce selects securities using its
proprietary, rules-based multi-factor scoring system, with all factors described
herein measured and determined by Royce, in an effort to identify companies
which combine favorable attributes of quality and value, as defined by Royce,
compared with companies within the same market sector. Royce ranks the
securities in the investment universe within each sector according to the
quality and value factors, which yields a model score that determines the
securities that are selected for inclusion in the fund’s portfolio. Sector
allocations are determined by the number of companies in each sector. For
quality factors, Royce focuses on a company’s profitability (as measured by
return on invested capital), the historic stability of its profitability (as
measured by variance of return on assets), and debt coverage (as measured by
cash flow relative to debt). The debt coverage ratio is used in an attempt to
limit the fund’s exposure to companies that Royce believes may have higher
financial risk. For value factors, Royce focuses on the free cash flow of a
company (i.e., net cash from operating activities minus capital expenditures)
compared to its enterprise value. Enterprise value is determined by adding the
company’s outstanding debt (including preferred stock and minority interests) to
the company’s market capitalization and then subtracting cash and cash
equivalents from the total value.
After
the securities are scored by quality and value factors, each security’s momentum
score, which is based on the price performance over the most recent 30 days, is
used to determine the timing of when the security may be bought or sold for the
fund (i.e., the momentum score is used by Royce to try to determine the
opportune time to buy or sell). For example, if a security selected for
inclusion in the fund’s portfolio according to the quality and value factors has
exhibited high momentum, Royce may temporarily delay purchasing such security.
Conversely, if a security selected for removal from the fund’s portfolio
according to the quality and value factors has exhibited high momentum, Royce
will typically sell such security as soon as is practicable.
Position
weights of securities within the fund’s portfolio are determined by Royce by
calculating a composite score based on company fundamentals that include book
value, revenue, free cash flow, and dividends paid. By using fundamental factors
to weight stocks rather than market capitalization, Royce seeks to have lower
exposure to overvalued companies while still maintaining broad diversification
within the fund’s portfolio. Royce generally seeks to limit the weight of
individual securities in the fund’s portfolio to no more than 3% of its net
assets and to limit sector exposures within the portfolio to no more than 25% of
its net assets, each measured at time of investment. Although the fund primarily
invests in equity securities of small-capitalization companies, the fund may
continue to hold or, in some cases, build positions in companies with higher
market capitalizations.
Royce’s
proprietary, rules-based multi-factor scoring system may incorporate information
and data obtained from third-party providers as supplementary to Royce’s own
proprietary research and analysis. Royce has the right to change the third-party
service providers that support this process at any time.
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Royce
may seek to sell a security if: (i) the security no longer meets its
quality and value criteria; (ii) the security reaches its position size
limit in the fund’s portfolio; (iii) there are adverse policy changes that
could affect the security’s outlook; or (iv) better investment
opportunities become available. The fund may engage in active and
frequent trading to achieve its investment objective, resulting in
high portfolio turnover.
Important information
The
fund’s investment objective is non‑fundamental and may be changed by the Board
of Trustees (the “Board”) without shareholder approval and on notice to
shareholders.
There
is no assurance that the fund will meet its investment objective.
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 Statement of Additional Information (“SAI”).
More on the fund’s
investments
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.
Cash management
The
fund may hold cash pending investment, and may invest in money market funds and
other money market instruments (e.g., short-term U.S. government securities,
high grade commercial paper, bank obligations or repurchase agreements) 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 subadviser has the ability to take defensive
positions, it may choose not to do so for a variety of reasons, even during
volatile market conditions.
Percentage and other
limitations
The
fund’s compliance with its investment limitations 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.
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.
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, armed conflicts, economic sanctions and countermeasures
in response to sanctions, major cybersecurity events, 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, wars, 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. Other
securities or markets could be similarly affected by past or future geopolitical
or other events or conditions. Furthermore, events involving limited liquidity,
defaults, non‑performance or other adverse developments that affect one
industry, such as the financial services industry, or concerns or rumors about
any events of these kinds, have in the past and may in the future lead to
market-wide liquidity problems, may spread to other industries, and could
negatively affect the value and liquidity of the fund’s investments.
The
fallout from the COVID‑19 pandemic and its subsequent variants, and the
long-term impact on economies, markets, industries and individual issuers, are
not known. Some sectors of the economy and individual issuers have experienced
or may experience particularly large losses. Periods of extreme volatility in
the financial markets; reduced liquidity of many instruments; and disruptions to
supply chains, consumer demand and employee availability, may continue for some
time. 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
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other
government intervention into the economy and financial markets may not work as
intended, and have resulted in a large expansion of government deficits and
debt, the long term consequences of which are not known. In addition, the
COVID‑19 pandemic, and measures taken to mitigate its effects, could result in
disruptions to the services provided to the fund by its service providers.
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, trust certificates,
limited partnership interests and shares of other investment companies,
including exchange-traded funds. 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.
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.
Asset class
risk. Securities 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.
Small capitalization
company risk. The fund will be exposed
to additional risks as a result of its investments in the securities of small
capitalization companies. Small capitalization companies may fall out of favor
with investors; may have limited product lines, operating histories, markets or
financial resources; or may be dependent upon a limited management group. The
prices of securities of small capitalization companies generally are more
volatile than those of large capitalization companies and are more likely to be
adversely affected than large capitalization companies by changes in earnings
results and investor expectations or poor economic or market conditions,
including those experienced during a recession. Securities of small
capitalization companies may underperform large capitalization companies, may be
harder to sell at times or at prices the portfolio managers believe appropriate
and may have greater potential for losses.
Portfolio management
risk. The value of your investment may
decrease if the subadviser’s judgment about the attractiveness or value of, or
market trends affecting, a particular security, industry, sector or region, or
about market movements, 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.
Quantitative model
risk. The fund, LMPFA, and Royce cannot
offer any assurance that the quantitative methodology used to determine the
composition of the fund’s portfolio will achieve its intended results or
maximize returns or minimize risks. When a model or data used in managing the
fund contains an error, is incorrect, or incomplete, any investment decision
made in reliance on the model or data may not produce the desired results and
the fund may realize losses. Royce may use information and data from third-party
providers, which may be incomplete, inaccurate or unavailable, and different
third-party providers may provide different or inconsistent information and
data.
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.
Quality stocks
risk. The fund invests in stocks that
Royce believes are high quality based on a number of factors. There is no
guarantee, however, that the past performance of these stocks will continue, and
Royce may be unsuccessful in evaluating the quality of individual stocks.
Profitability and other measures of a stock’s quality can be adversely affected
by market, regulatory, political, environmental and other factors, and the
degree to which these factors affect a stock’s performance can be difficult to
predict. The price of a stock also may be affected by factors other than those
factors considered by Royce.
Value investing
risk. The value approach to investing
involves the risk that stocks may remain undervalued for long periods,
undervaluation may become more severe, or perceived undervaluation may actually
represent intrinsic value. Value stocks may underperform the overall equity
market for an extended period while the market favors growth stocks. A value
stock may not increase in price as anticipated by Royce if other investors fail
to recognize the company’s value and bid up the price or the factors that Royce
believes will increase the price of the security do not occur or do not
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have
the anticipated effect. Value stocks may go in and out of favor over time and
Royce may sell a security prior to the security realizing a gain in connection
with changed market perception regarding the value of the security.
Issuer
risk. The market price of a security can
go up or down more than the market as a whole and can perform differently from
the value of the market as a whole, due to factors specifically relating to the
security’s issuer, such as disappointing earnings reports by the issuer,
unsuccessful products or services, loss of major customers, changes in
management, corporate actions, negative perception in the marketplace, or major
litigation or changes in government regulations affecting the issuer or the
competitive environment. An individual security may also be affected by factors
relating to the industry or sector of the issuer. The fund may experience a
substantial or complete loss on an individual security. A change in financial
condition or other event affecting a single issuer may adversely impact the
industry or sector of the issuer or securities markets as a whole.
Illiquidity
risk. Illiquidity risk exists when
particular investments are or may become impossible or difficult to sell or
impossible or difficult to purchase. Although most of the fund’s investments
must be liquid at the time of investment, investments may become illiquid after
purchase by the fund, particularly during periods of market turmoil. 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, including U.S. Treasury securities. As a general matter, dealers
have been less willing to make markets for fixed income 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 substantial 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.
Small fund
risk. When the fund’s size is
small, the fund may experience low trading volume and wide bid/ask spreads. In
addition, the fund may face the risk of being delisted if the fund does not meet
certain conditions of the listing exchange. If the fund were to be required to
delist from the listing exchange, the value of the fund may rapidly decline. In
addition, any resulting liquidation of the fund could cause the fund to incur
elevated transaction costs for the fund and negative tax consequences for its
shareholders. Shareholders of smaller funds may bear proportionally higher
expenses than those of a fund with greater assets.
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.
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.
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
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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. Additionally, in stressed market conditions, the
market for the fund’s shares may become less liquid in response to deteriorating
liquidity in the markets for the fund’s portfolio holdings, which may cause a
significant variance in the market price of the fund’s shares and their
underlying value and wider bid/ask spreads. 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.
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.
Financial services
sector risk. Companies in the financial
services sector of an economy are subject to extensive and increasing
governmental regulation and intervention, which may adversely affect the scope
of their activities, the prices they can charge, the amount of capital they must
maintain and, potentially, their size. Governmental regulation may change
frequently and may have significant adverse consequences for companies in the
financials sector, including effects not intended by such regulation. The impact
of more stringent capital requirements, or recent or future regulation in
various countries of any individual financial company or of the financials
sector as a whole, cannot be predicted. Certain risks may impact the value of
investments in the financials sector more severely than those of investments
outside this sector, including the risks associated with companies that operate
with substantial financial leverage. Companies in the financials sector may also
be adversely affected by increases in interest rates and loan losses, decreases
in the availability of money or asset valuations, credit rating downgrades and
adverse conditions in other related markets. Insurance companies, in particular,
may be subject to severe price competition and/or rate regulation, which may
have an adverse impact on their profitability. The financial services sector is
particularly sensitive to fluctuations in interest rates. The financials sector
is also a target for cyber attacks, and may experience technology malfunctions
and disruptions. In recent years, cyber attacks and technology failures have
become increasingly frequent in this sector and have reportedly caused losses to
companies in this sector, which may negatively impact a fund. Interconnectedness
or interdependence among financial services companies increases the risk that
the financial distress or failure of one financial services company may
materially and adversely affect a number of other financial services companies
or the financial services sector as a whole.
Consumer
discretionary sector risk. The success
of consumer product manufacturers and retailers is tied closely to the
performance of domestic and international economies, interest rates, exchange
rates, competition, inflation, trade and tariff arrangements, supply chain
disruptions, consumer confidence, changes in demographics and consumer
preferences. Companies in the consumer discretionary sector depend heavily on
disposable household income and consumer spending, and may be strongly affected
by social trends and marketing campaigns. These companies may be subject to
severe competition, which may have an adverse impact on their profitability.
Changes in demographics and consumer preferences also can affect the demand for,
and success or, consumer discretionary products in the marketplace.
Industrials sector
risk. The value of securities issued by
companies in the industrials sector may be adversely affected by supply and
demand related to their specific products or services and industrials sector
products in general. The products of manufacturing companies may face
obsolescence due to rapid technological developments and frequent new product
introduction. Government regulations, world events, economic conditions, trading
and tariff arrangements, trade disruptions, commodity prices and availability,
and exchange rates may adversely affect the performance of companies in the
industrials sector. Companies in the industrials sector may be adversely
affected by liability for environmental damage and product liability claims.
Aerospace and defense companies, a component of the industrials sector, can be
significantly affected by government spending policies because companies
involved in this industry rely, to a significant extent, on government demand
for their products and services. Thus, the financial condition of, and investor
interest in, aerospace and defense companies are heavily influenced by
governmental defense
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spending
policies, which are typically under pressure from efforts to control government
budgets. Transportation stocks, a component of the industrials sector, are
cyclical and can be significantly affected by economic changes, fuel prices,
labor relations and insurance costs. Transportation companies in certain
countries may also be subject to significant government regulation and
oversight, which may adversely affect their businesses.
Portfolio turnover
risk. The subadviser will sell a
security when it believes it is appropriate to do so, regardless of how long the
fund has held the security. The fund’s portfolio turnover rate may exceed 100%
per year because of the anticipated use of certain investment strategies. The
rate of portfolio turnover will not be a limiting factor for the subadviser in
making decisions on when to buy or sell securities. High turnover will increase
the fund’s transaction costs and may increase your tax liability if the
transactions result in capital gains.
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 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.
Cybersecurity
risk. Cybersecurity incidents, whether
intentionally caused by third parties or otherwise, 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, redeeming or exchanging shares,
receiving distributions or receiving timely information regarding the fund or
their investment in the fund. 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, the manager, and/or the subadviser.
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.
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.
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 (including those due to cybersecurity incidents), changes
in personnel, and errors caused by third party service providers or trading
counterparties. It is not possible to identify all of the operational risks that
may affect the fund or to develop processes and controls that eliminate or
mitigate the occurrence of such failures. The fund and its shareholders could be
negatively impacted as a result.
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, 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
the United States. The fund has
significant exposure to U.S. issuers. A decrease in imports or exports, tariffs
and trade disruptions, supply chain disruptions, changes in trade regulations,
trade treaties or diplomatic relations and/or an economic recession in the
United States may have a material adverse effect on the U.S. economy and the
securities listed on U.S. exchanges. Policy and legislative changes in the
United States may have a significant effect on aspects of financial and other
regulation, the U.S. markets generally, as well as the value of certain
securities. In addition, a continued rise in the U.S. public debt level or U.S.
austerity measures may adversely affect U.S. economic growth and the securities
to which the fund has exposure.
Cash transactions
risk.
ETFs generally are able to make in‑kind redemptions and avoid being taxed
on gain on the distributed portfolio securities at the fund level. To the extent
that the fund effects redemptions partly or entirely in cash, rather than
in‑kind, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. If the fund recognizes gain on
these sales, this generally will cause the fund to recognize gain it might not
otherwise have recognized, or to recognize such gain sooner than would otherwise
be required if it were to distribute portfolio securities in‑kind. 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 different ETF. Moreover, cash transactions may
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Quant Small-Cap Quality Value ETF |
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 principally in‑kind, could be imposed on the fund and thus decrease the
fund’s NAV to the extent they are not offset by the creation and redemption
transaction fees paid by purchasers and redeemers of Creation Units.
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.
Tax advantaged product
structure
Unlike
many conventional mutual funds which are only bought and sold at closing net
asset values, the shares of the fund have been designed to be created and
redeemed principally in‑kind (although under some circumstances its shares are
created and redeemed entirely or partially for cash) in Creation Units at each
day’s market close. These in‑kind arrangements are designed to mitigate adverse
effects on the fund’s portfolio that could arise from frequent cash purchase and
redemption transactions that affect the net asset value of the fund. Moreover,
in contrast to conventional mutual funds, where frequent redemptions can have an
adverse tax impact on taxable shareholders because of the need to sell portfolio
securities—which, in turn, may generate taxable gain—the in‑kind redemption
mechanism of the fund, to the extent used, generally is not expected to result
in a taxable distribution for shareholders whose shares are not being redeemed
or sold.
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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, 2023, LMPFA’s total assets under
management were approximately $190.69 billion.
Royce &
Associates, LP (Royce & Associates, LP primarily conducts its business
under the name Royce Investment Partners (“Royce” or the “subadviser”)) provides
the day‑to‑day portfolio management of the fund except for any portion of the
fund’s cash and short-term instruments that is allocated to Western Asset
Management Company (“Western Asset”). Royce, with offices at 745 Fifth Avenue,
New York, NY 10151, has been investing in smaller-company securities with a
value approach for more than 45 years. As of March 31, 2023, Royce’s total
assets under management were approximately $11.75 billion.
Western
Asset manages the portion of the fund’s cash and short-term instruments
allocated to it. 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 acts as investment adviser to institutional
accounts, such as corporate pension plans, mutual funds and endowment funds. As
of March 31, 2023, the total assets under management of Western Asset and
its supervised affiliates were approximately $397.45 billion.
LMPFA
and Western Asset are indirect, wholly-owned subsidiaries of Franklin Resources,
Inc. (“Franklin Resources”), and Royce is a majority owned subsidiary of
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, 2023, Franklin Templeton’s asset management
operations had aggregate assets under management of approximately $1.42
trillion.
Portfolio managers
Primary
responsibility for the day‑to‑day management of the fund lies with the following
portfolio managers.
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Portfolio
manager |
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Title and recent biography |
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Portfolio manager
of the fund since |
George
Necakov, CFA |
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Portfolio
Manager, Principal, and Director of Quantitative Strategies of Royce.
Mr. Necakov joined Royce in 1994 and has been involved in portfolio
management since 1998. He holds a bachelor’s degree from New York
University.
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2017 |
Michael
Connors |
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Assistant
Portfolio Manager and Director of Portfolio Analytics of Royce.
Mr. Connors joined Royce in 2003 and has been involved in
quantitative research since 2014. He holds a bachelor’s degree from Mount
Saint Mary College and a Masters of Business Administration from Zicklin
School of Business—Baruch College.
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2017 |
The
SAI provides information about the compensation of the portfolio managers, other
accounts managed by the portfolio managers and any fund shares held by the
portfolio managers.
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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Management fee |
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Quant Small‑Cap Quality Value ETF |
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0.60%
of average daily net assets |
For
the fiscal year ended March 31, 2023, the fund paid LMPFA an effective
management fee of 0.60% 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 September 30, 2022.
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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 One Franklin Parkway,
San Mateo, CA 94403-1906, 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 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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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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Quant Small‑Cap Quality Value ETF |
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SQLV |
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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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.
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 the
valuation policy approved by the Board. The fund’s manager serves as the fund’s
valuation designee for purposes of compliance with Rule 2a‑5 under the
Investment Company Act of 1940, as amended. Under the valuation policy, 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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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 will price securities in accordance with the valuation policy.
The valuation policy permits, 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. These
determinations are subject to the Board’s oversight. 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. |
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.
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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Dividends, other
distributions and taxes
Dividends and other
distributions
The
fund generally pays dividends quarterly from its net investment income, if any,
and from short-term capital gain (if any). Shares will generally begin to earn
dividends on the settlement date of purchase. The fund generally distributes
long-term capital gain, if any, once in December and at such other times as are
necessary. 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 professional 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 of investment income that the fund reports as “qualified
dividend income” 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 professional 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.
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.
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.
|
|
|
| |
20 |
|
| |
Royce
Quant Small-Cap Quality Value 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, 2023, the standard creation and
redemption transaction fees, the additional charge for creations and the maximum
additional charge for redemptions (as described above):
|
|
|
|
|
| |
Royce Quant Small-Cap Quality Value
ETF |
|
| |
|
21 |
|
|
|
|
|
|
| |
|
|
Standard
Creation/
Redemption
Transaction
Fee ($) |
|
Additional
Charge for
Creations* (%) |
|
Maximum
Additional Charge
for
Redemptions** (%) |
Royce
Quant Small‑Cap Quality Value ETF |
|
550 |
|
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. |
|
|
|
| |
22 |
|
| |
Royce
Quant Small-Cap Quality Value 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/1645194/000119312523155401/d765228dncsr.htm).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
For a share of beneficial interest outstanding
throughout each year ended March 31, unless otherwise
noted: |
|
|
|
20231 |
|
|
20221,2 |
|
|
20211,3 |
|
|
20201,3 |
|
|
20191,3 |
|
|
20181,3 |
|
|
|
|
|
|
| |
Net asset value,
beginning of period |
|
$ |
38.64 |
|
|
$ |
37.85 |
|
|
$ |
22.80 |
|
|
$ |
26.21 |
|
|
$ |
30.06 |
|
|
$ |
24.95 |
|
|
|
|
|
|
| |
Income (loss) from operations: |
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
Net
investment income |
|
|
0.47 |
|
|
|
0.36 |
|
|
|
0.35 |
|
|
|
0.35 |
|
|
|
0.35 |
|
|
|
0.31 |
|
Net
realized and unrealized gain (loss) |
|
|
(3.15) |
|
|
|
0.82 |
|
|
|
15.03 |
|
|
|
(3.42) |
|
|
|
(3.77) |
|
|
|
4.91 |
|
Total income
(loss) from operations |
|
|
(2.68) |
|
|
|
1.18 |
|
|
|
15.38 |
|
|
|
(3.07) |
|
|
|
(3.42) |
|
|
|
5.22 |
|
|
|
|
|
|
| |
Less distributions from: |
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
Net
investment income |
|
|
(0.44) |
|
|
|
(0.39) |
|
|
|
(0.33) |
|
|
|
(0.34) |
|
|
|
(0.43) |
|
|
|
(0.11) |
|
Return of capital |
|
|
(0.02) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
distributions |
|
|
(0.46) |
|
|
|
(0.39) |
|
|
|
(0.33) |
|
|
|
(0.34) |
|
|
|
(0.43) |
|
|
|
(0.11) |
|
|
|
|
|
|
| |
Net asset value, end of period |
|
$ |
35.50 |
|
|
$ |
38.64 |
|
|
$ |
37.85 |
|
|
$ |
22.80 |
|
|
$ |
26.21 |
|
|
$ |
30.06 |
|
Total return,
based on NAV4 |
|
|
(6.88) |
% |
|
|
3.15 |
% |
|
|
67.77 |
% |
|
|
(11.71) |
% |
|
|
(11.29) |
% |
|
|
20.97 |
% |
|
|
|
|
|
| |
Net assets, end of
period (000s) |
|
$ |
24,849 |
|
|
$ |
19,320 |
|
|
$ |
17,031 |
|
|
$ |
11,402 |
|
|
$ |
10,483 |
|
|
$ |
4,509 |
|
|
|
|
|
|
| |
Ratios to average net assets: |
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
Gross
expenses |
|
|
0.60 |
% |
|
|
0.60 |
%5 |
|
|
0.60 |
% |
|
|
0.60 |
% |
|
|
0.60 |
% |
|
|
0.60 |
% |
Net
expenses |
|
|
0.60 |
|
|
|
0.60 |
5 |
|
|
0.60 |
|
|
|
0.60 |
|
|
|
0.60 |
|
|
|
0.60 |
|
Net
investment income |
|
|
1. |
33 |
|
|
1.39 |
5 |
|
|
1.13 |
|
|
|
1.46 |
|
|
|
1.30 |
|
|
|
1.12 |
|
|
|
|
|
|
| |
Portfolio turnover
rate6
|
|
|
51 |
% |
|
|
73 |
% |
|
|
99 |
% |
|
|
95 |
% |
|
|
87 |
% |
|
|
80 |
% |
1 |
Per
share amounts have been calculated using the average shares method.
|
2 |
For
the period August 1, 2021 through March 31, 2022.
|
3 |
For
the year ended July 31. |
4 |
Performance
figures may reflect fee waivers and/or expense reimbursements. In the
absence of fee waivers and/or expense reimbursements, the total return
would have been lower. The total return calculation assumes that
distributions are reinvested at NAV. Past performance is no guarantee of
future results. Total returns for periods of less than one year are not
annualized. |
6 |
Portfolio
turnover excludes the value of portfolio securities received or delivered
as a result of in‑kind fund share transactions.
|
|
|
|
|
|
| |
Royce Quant Small-Cap Quality Value
ETF |
|
| |
|
23 |
|
Royce Quant Small‑Cap Quality Value 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)