Product Panel: Franklin Templeton’s active green bond ETF

Tom Eckett

a forest with trees

Earlier this week, Franklin Templeton Investments became the first asset manager to launch an actively-managed euro green bond ETF.

The Franklin Liberty Euro Green Bond UCITS ETF (FLRG) is managed by the firm’s head of European fixed income David Zahn and Rod MacPhee, portfolio manager in the Franklin Templeton Fixed Income Group.

While active ETFs are yet to take off in the equity space, primarily due to asset managers not wanting to give away their secret sauce, in fixed income, products are far more popular due to the opaqueness of the market.

Following the launch, we asked the Product Panel to take a look at the constituents of the ETF and judge what its appeal might be to investors looking to gain exposure to an actively-managed ESG ETF.

Kenneth Lamont, Morningstar

The Franklin Liberty Euro Green Bond UCITS ETF (FLRG) is the second European Green bond ETF to hit the market.

Unlike the first, launched in 2018 by Unicredit to passively capture the European Green bond market, it is actively managed. Where the Unicredit ETF tracks the Bloomberg Barclays MSCI Euro Green Bond Index the Franklin ETF explicitly aims to beat that same index.

It is given flexibility to do so, being permitted to invest up to 30% in ‘unlabelled’ bonds which are deemed to be climate aligned. It is this ability to go off-piste and invest in these lesser-known bonds that is the fund’s key differentiating factor.

Investors should ensure they are content with the climate credentials of these ‘unlabelled green bonds’, as they don’t have the rubber stamp of approval that comes with official Green Bond status.

Sporting an ongoing charge of 0.30%, the Franklin fund impressively undercuts its purely passive peer.

Nicolas Rabener, FactorResearch

While active management is a lost battle in most parts of the equity market, active bond managers have been beating their benchmarks. Franklin Templeton aims to exploit the unique characteristics of bond markets via the launch of actively-managed FLRG and outperform the Bloomberg Barclays MSCI Euro Green Bond index. The ETF is priced at 0.30%, which is more than iShares respective global index tracker at 0.22%, but cheaper than UniCredit's European index tracker at 0.35%.

Oliver Smith, IG Group

Green bonds by their nature tend to have fewer holdings than an all-market equivalent, which is evident in this ETF. However, the issuers are spread over a broad number of names and the product will be highly diversified.

An ongoing concern about fixed income, is what might happen if there is a shock to the market and liquidity dries up? FLRG deliberately targets “opportunities that are less well-known… because there is comparatively less demand”, at a point of stress, you would expect spreads on the underlying to widen vs. holdings in more conventional corporate bond funds. ESG investors may no longer have to compromise on performance, but they may have to on liquidity.

Henry Cobbe, Elston Consulting

This launch is another reminder that just because it is an ETF, it does not mean it is passive. ETFs are making the bond market more accessible to investors of any size and the ETF format enables an additional layer of liquidity.

Furthermore, there is growing interest from portfolio manaers and their clients in ethical and environmentally-friendly investment strategies. While there are plenty of ESG and green building blocks in the equity space, there is less choice in the bond market, so this launch is welcome for the access and liquidity it provides. However, we would want to see a GBP-hedged class for UK investors that do not want to mismatch currency exposure. 

To see our product panel on the launch of the first ever pure play Kuwait ETF, the KMEFIC FTSE Kuwait Equity UCITS ETF (KUW8), click here.


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