ETF Pulse Check Franklin Sustainable International Equity ETF

The Franklin Sustainable International Equity ETF (MCSE) is a compelling investment vehicle focused on a concentrated equity portfolio of foreign companies, carefully selected based on ESG criteria and long-term potential. With a high-conviction strategy, MCSE invests in 20 to 40 non-US equities across various market capitalizations, emphasizing companies with robust governance and sustainability profiles. This focus is particularly timely, as it aligns with the increasing investor demand for sustainable investment practices amidst global economic uncertainties. By filtering out high-risk companies and those significantly involved in tobacco, weapons, fossil fuels, and certain mining sectors, MCSE aims to deliver sustainable returns over the long term. The fund's recent conversion from a mutual fund to an actively managed ETF structure, starting with $30 million in net assets, marks a strategic shift that could enhance its market appeal and operational flexibility.

Basic Information
The Franklin Sustainable International Equity ETF, trading under the ticker MCSE, is issued by Franklin Templeton and was initially launched on November 30th, 2015. It carries an expense ratio of 0.61%, which is slightly above the industry average. The ETF's portfolio is concentrated, with the top 15 holdings encompassing major global companies such as Ferrari, Resmed, and Linde, with Ferrari having the largest weight at 8.68%. Notably, the fund's sector exposure is led by Information Technology at 17.69%, followed by Health Care and Consumer Discretionary sectors. Despite recent market stability, as indicated by 7-day and 30-day net flow ratios of 0.00%, the fund's performance has shown variability with average returns of 7.43% over six months and 6.39% over three years, juxtaposed against a 4.87% return in the past year. Volatility remains relatively contained, with return standard deviations under 6% across various periods, and a maximum drawdown of 0.86% over one and three years, suggesting a stable risk profile.

News Summary
The ETF's performance is partially influenced by developments in the consumer discretionary sector, which has shown resilience due to strong GDP growth, rising incomes, and robust spending among top earners. Current sentiment indicates a recovery in discretionary spending, despite broader economic pressures. The sector's performance continues to be a focal point, with key players like Amazon and Best Buy driving market momentum. On a macroeconomic level, geopolitical tensions concerning Taiwan Semiconductor Manufacturing Company (TSMC) and the ongoing U.S. government shutdown present potential risks. The shutdown may delay key economic data releases, while the geopolitical landscape could impact TSMC's operations, influencing MCSE's performance given its significant exposure to TSMC.

Analyst Rating: Hold
The Franklin Sustainable International Equity ETF is rated as a Hold. While the ETF boasts solid stability and effective sector concentration, its higher-than-average expense ratio and moderate return performance suggest areas for enhancement. The fund's stability is underscored by low volatility and minimal drawdowns, making it a potentially reliable option during market fluctuations. However, its short-term performance variability and cost structure warrant a cautious approach, balancing its sustainable investment focus against these considerations.

Backtest Scenario
A backtest was conducted to evaluate the Franklin Sustainable International Equity ETF's performance during the 2018-2019 U.S. government shutdown, with a particular focus on the resilience of the consumer discretionary sector. The results indicated that consumer discretionary stocks, a notable component of MCSE's holdings, demonstrated relative strength during the shutdown, driven by robust consumer spending and economic resilience. This historical performance underscores the potential stability of the ETF in similar future scenarios.

Risk Outlook
The Franklin Sustainable International Equity ETF faces a complex risk landscape shaped by macroeconomic and sector-specific dynamics. The consumer discretionary sector's resilience, driven by GDP growth, is offset by concerns about declining financial well-being. The potential for an extended U.S. government shutdown introduces additional uncertainty, potentially impacting investor confidence and equity markets. Geopolitical tensions involving TSMC, a key holding, could disrupt global supply chains, affecting MCSE's value. Moreover, the Federal Reserve's interest rate outlook poses risks to sectors within the ETF sensitive to rate changes, such as technology and industrials. Concentration risk in major holdings like Ferrari and Resmed could lead to increased volatility, while liquidity risks remain low but susceptible to sudden market shifts.

Conclusion
The Franklin Sustainable International Equity ETF offers a balanced investment proposition, suitable for investors with a moderate risk appetite seeking stable returns with an emphasis on sustainability. Its focus on ESG criteria and sector diversification presents a robust case for long-term investment, though potential investors should monitor geopolitical developments and macroeconomic policy shifts closely. As the ETF navigates these complex market dynamics, its performance will hinge on its ability to manage costs and sustain its stability amidst evolving global conditions.