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By John Gabriel

Another prominent fund shop--Legg Mason (NYSE:LM)--plans to join the exchange-traded fund party. The firm filed for exemptive relief on Feb. 22, revealing plans to develop its own suite of actively managed ETFs. At this point, the specific strategies and managers have yet to be determined/disclosed, however, Legg Mason has stated that it is considering both equity and fixed-income funds.

The exemptive relief application process could take several months and is one of the first steps in bringing an ETF to market. If the SEC grants Legg Mason with exemptive relief, we should start learning more about the specifics of the firm's ETF strategy. As of now, the firm isn't planning to convert any of its existing mutual funds into ETFs. Bill Thomas, Grail Advisors CEO, recently disclosed that his firm is close to announcing the conversion of a prominent mutual fund(s) into an actively managed ETF(s). Legg Mason has made clear, however, that this isn't the path it plans to take.

Legg Mason's plan to get into the rapidly expanding ETF industry comes on the heels of a year that saw several fund industry giants toss their hats into the ETF ring. After dragging their feet for several years, many fund companies are now embracing the opportunity to capture a slice of one of the most popular and fastest-growing segments of the asset-management industry. With actively managed ETFs now trading--though still in their infancy--it certainly makes sense to see traditional fund firms finally take the plunge into ETFs.

The walls are starting to crumble in the mutual funds versus ETFs debate. Both are delivery vehicles that offer access to various investment strategies. Each structure has its pros and cons. As the actively managed ETF industry continues to develop, we could soon see the day that investors can simply choose the structure that best fits their needs. After determining their desired investment strategy, investors would then also be able to decide how to access the strategy--via ETF or mutual fund.

The extremely successful ETF debuts from industry heavyweights Charles Schwab (NYSE:SCHW) and PIMCO in the back half of 2009 might have been the last bit of motivation to drive Legg Mason to file for exemptive relief. We expect 2010 will be another exciting year in the ETF industry. Along with Legg Mason, other major fund companies that have recently applied for exemptive relief to launch ETFs include T. Rowe Price (NASDAQ:TROW), Russell Investments, John Hancock, and Goldman Sachs (NYSE:GS).

Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.

Source: Legg Mason Is Latest Fund Shop to Join ETF Fray