Franklin Templeton has launched the first actively managed ETF targeting the euro-denominated green bond market.
Caroline Baron, Head of ETF Sales EMEA, Franklin Templeton
The Franklin Liberty Euro Green Bond UCITS ETF (FLRG GR) has listed on Deutsche Börse in euros and comes with a total expense ratio (TER) of 0.30%.
The fund seeks to maximize returns whilst providing exposure to bonds supporting projects that are aligned with a low-carbon future.
It will invest at least 70% of its assets in securities that are formally labeled ‘green’ according to the voluntary Green Bond Principles which promote transparency, disclosure, and integrity in the green bond market.
Green bonds generally offer a fixed return and may be issued by financial institutions, governments, or corporations. Since the first issuance in 2007, Europe has remained a cornerstone in the global green bond market, with cumulative issuance totaling €165 billion.
The remainder of the portfolio will be allocated to unlabelled bonds which are ‘climate-aligned’. Franklin Templeton defines these securities as bonds that are not labeled green but are nonetheless financing solutions that contribute to a low-carbon future while at the same time reducing their own carbon intensity.
The fund, which seeks to outperform the Bloomberg Barclays MSCI Euro Green Bond Index, will be managed by David Zahn, Head of European Fixed Income, and Rod MacPhee, Portfolio Manager.
The managers will employ fundamental, bottom-up credit analysis on corporate bonds while drawing from Franklin Templeton’s proprietary ESG model on sovereigns. While the focus will be on eligible green bond securities, each investment will be subject to internal credit approval.
Caroline Baron, Head of ETF Sales EMEA, Franklin Templeton, said, “Demand is rising in Europe for high conviction ESG products due to increasing investor and regulatory pressure to incorporate green, ethical and governance factors into investment portfolios.
“While traditional passive ETFs continue to grow in popularity, we believe that with securities such as green bonds, an actively-managed ETF vehicle that offers full transparency, flexibility, and tradability can add value and insight to investors. With this new addition, we are excited that the Franklin Liberty Euro Green Bond UCITS ETF will further complement our existing active management ETF range.”
David Zahn, added, “In periods of risk aversion, green bonds exhibit lower volatility as investors tend to hold on to these bonds. Our data indicate that in both the primary markets and secondary markets, 72% of green bonds had tighter spreads than ordinary bonds after seven days, and 62% were tighter after 28 days respectively. We believe that active management gives us the best opportunity to benefit from these pricing opportunities. As for unlabelled green bonds, we think this universe offers compelling opportunities that are less well-known than their labeled green counterparts because there is comparatively less demand.”
The fund is also set to list on the London Stock Exchange in euros (FLRG LN) and pound sterling (FVUG LN) and in euros on Borsa Italiana (FLRG IM) and SIX Swiss Exchange (FLRG SW).
The new fund will likely compete for assets with similar products, albeit passive, from Lyxor and UniCredit.
The Lyxor Green Bond UCITS ETF (CLIM LN) provides exposure to euro- and US dollar-denominated green bonds through tracking the Solactive Green Bond EUR USD IG Index. It comes with a TER of 0.25%.
Alternatively, the UC MSCI European Green Bond EUR UCITS ETF (ECBI GY), which is linked to the Bloomberg Barclays MSCI European Green Bond Issuer Capped EUR Index, provides exposure to euro-denominated green bonds from European issuers only. Its TER is 0.35%.