Mutual Fund Firm Hotchkis Wiley Files for its First ETF

Hotchkis & Wiley Capital Management, a global investment manager founded in 1980, has filed with the Securities and Exchange Commission (SEC) to offer its first exchange-traded fund (ETF), according to a recent filing. The H&W SMID Cap Diversified Value Fund will be an actively managed ETF, focusing on small- to mid-capitalization companies that the firm deems to be undervalued.



The fund will use a fundamental value investing approach, seeking to exploit market inefficiencies created by irrational investor behavior. To uncover investment opportunities, the fund will employ a disciplined, bottom-up investment process based on a proprietary model augmented with internally generated fundamental research. The fund is expected to hold approximately 150 to 200 portfolio securities.

As part of its investment process, Hotchkis & Wiley will evaluate the general and industry-specific environmental, social, and governance (ESG) factors that it believes are most financially material to a company's short-, medium-, and long-term enterprise value. This evaluation contributes to the firm's overall analysis of a company's value creation for shareholders and future financial performance.

In addition to the ETF filing, Hotchkis & Wiley has also sought exemptive relief from the SEC. The firm is seeking an order that would allow a mutual fund to offer an ETF share class and an ETF to offer one or more mutual fund share classes. This would enable mutual fund shares offered by an ETF to be made available to retirement plan participants on retirement plan platforms, potentially benefiting both ETF class and mutual fund class shareholders of a fund.

With its application, Hotchkis & Wiley joins a long list of firms seeking exemptive relief relating to a multiclass structure. Like others before it, Hotchkis & Wiley's application cited an exemptive order the SEC granted to Vanguard Group in 2000, which allowed Vanguard to offer certain index-based open-end management investment companies with mutual fund classes and exchange-traded classes.

The spokesman for Hotchkis & Wiley declined to comment on the exemptive relief application beyond what was in the filing. Los Angeles-based Hotchkis & Wiley offers "value equity strategies across the capitalization spectrum as well as expertise in high-yield credit," according to its website. The firm, which serves institutional and individual investors, had about $33 billion in assets under management as of Sept. 30, 2024.

The firm's track record speaks to the potential success of its first ETF. All 10 of its actively managed mutual funds, from US large-cap stocks to high-yield bonds and international small-cap equities, beat their benchmarks in the three and five years through August 2024. This rare feat is a testament to the firm's commitment to value investing and its ability to exploit market inefficiencies, even in today's momentum-chasing, passive-driven world.