The Implications of Franklin Templeton's ETF Liquidation on ESG and International Equity Strategies

The recent liquidation of Franklin Templeton’s ESG and international equity ETFs in 2025 has sent ripples through the sustainable investing landscape, exposing vulnerabilities in active management and reshaping investor behavior. As the firm shuttered its $32.4 million Mirova Global Green Bond Fund and other niche strategies, the event underscored systemic challenges in liquidity, diversification, and risk management for specialized ETFs. This analysis explores the cascading effects of these closures on ESG and international equity strategies, with a focus on strategic portfolio reallocation and the evolving risk frameworks investors must adopt.

The ESG Liquidity Crunch and Active Management’s Decline

Franklin Templeton’s decision to liquidate its ESG ETFs reflects a broader industry trend: the underperformance of active strategies in a market increasingly dominated by low-cost index funds. According to a report by New Investing Ideas, 91% of the $1.7 billion green bond segment is concentrated in four funds, leaving the ecosystem highly susceptible to disruptions like the Mirova fund’s closure [1]. With institutional investors accounting for 59% of holdings in such niche ESG products, the lack of retail demand exacerbates liquidity risks, particularly for smaller funds [2].

The SPIVA 2025 U.S. Scorecard further reinforces this dynamic, revealing that 54% of actively managed large-cap U.S. equity funds underperformed the S&P 500 in the first half of 2025—a marked improvement from 65% in 2024 but still a stark reminder of passive strategies’ dominance [3]. For ESG investors, this has accelerated a shift toward passively managed index funds, with 145 such ETFs now holding $109.3 billion in assets as of July 31, 2025 [3].

Strategic Reallocation: Passive ESG ETFs and Alternative Exposure

Investors abandoning closed Franklin Templeton funds are increasingly turning to passive alternatives. The RACWI US ETF, which tracks the Research Affiliates Cap-Weighted US Index, exemplifies this trend. By weighting companies based on fundamental metrics like adjusted sales and cash flow rather than market capitalization, it offers a diversified, rules-based approach to ESG-aligned exposure [4]. Similarly, the Bluerock Total Income+ Real Estate Fund’s transition to a listed closed-end fund (CEF) on the NYSE highlights a growing emphasis on liquidity safeguards, enabling shareholders to trade shares in open markets—a critical feature in a post-liquidation environment [5].

For international equity strategies, the closures have prompted a reevaluation of geographic and sectoral diversification. Investors are prioritizing broad-market index funds over concentrated active strategies, particularly in emerging markets, where volatility and currency risks remain elevated. This shift aligns with the broader industry’s move toward cost efficiency, as highlighted by the SPIVA report’s emphasis on long-term outperformance by index funds [3].

Risk Management: Lessons from the Franklin Templeton Closures

The liquidation of niche ESG ETFs has exposed critical gaps in risk management frameworks. Franklin Templeton’s struggles to maintain sufficient assets under management (AUM) in its green bond fund illustrate the challenges of sustaining specialized products in a market where retail investor interest lags [1]. To mitigate such risks, investors must adopt more rigorous due diligence, scrutinizing fund liquidity, expense ratios, and alignment with broader portfolio goals.

Enhanced oversight is also needed in thematic strategies, where concentrated holdings and low trading volumes can amplify volatility. For instance, the green bond segment’s reliance on a handful of dominant funds leaves it vulnerable to systemic shocks—a risk that could be mitigated through greater diversification and regulatory scrutiny [1].

Conclusion: Navigating the New ESG Landscape

Franklin Templeton’s ETF liquidations serve as a cautionary tale for the ESG and international equity sectors. As active strategies face mounting pressure to justify their value, investors are recalibrating portfolios to prioritize liquidity, diversification, and cost efficiency. The rise of passive ESG ETFs and innovative indexing approaches like RACWI’s fundamental-weighted model signals a maturing market—one that demands both adaptability and vigilance in risk management. For those navigating this evolving terrain, the lessons from 2025 will be pivotal in shaping resilient, forward-looking investment strategies.

Source:
[1] New Investing Ideas, [https://sustainableinvest.com/new-investing-indeas/]
[2] Post-Effective Amendment to Registration Statement by ..., [https://www.publicnow.com/view/0218BC27C0DF2EB7DC4B192C68904780377AF14D?1752518859]
[3] SPIVA U.S. Scorecard, [https://sustainableinvest.com/new-investing-indeas/]
[4] RACWI Combined, [https://www.sec.gov/Archives/edgar/data/1592900/000159290025000729/racwicombined.htm]
[5] Alternative Investment News - Weekly Updates, [https://www.factright.com/weekly-updates/?_hsenc=p2ANqtz-_jnyenJInnC9jkwgow6Y57IWFV_FzaGICnDUV5xSgObSZ2YaxRQKHOa46MuYztnhaSpoUH&utm_campaign=Weekly%20Update&utm_medium=email&utm_source=hs_email]