FLZA Franklin FTSE South Africa ETF

INFORMATION STATEMENT

This Information Statement describes a recent change involving the investment management of the Franklin Liberty U.S. Core Bond ETF (the “Fund”), a series of Franklin Templeton ETF Trust (the “Trust”).  At an in-person meeting held on November 21, 2019 (the “Meeting”), the Trust’s Board of Trustees (the “Board” or the “Trustees”), on behalf of the Fund, appointed Franklin Templeton Institutional, LLC (“FT Institutional”) as the sub-advisor to the Fund and approved a new sub-advisory agreement between Franklin Advisers, Inc. (“Advisers”), the Fund’s investment manager, and FT Institutional, effective November 21, 2019, pursuant to which FT Institutional supports Advisers in providing investment advice to the Fund. Advisers has the ultimate responsibility, subject to the oversight by the Board, to oversee the Fund’s sub-advisor(s) and recommend their hiring, termination and replacement.  Under an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”), Advisers is permitted to appoint and replace both wholly owned and unaffiliated sub-advisors, and enter into, amend and terminate sub-advisory agreements without obtaining prior shareholder approval, but subject to the approval of the Board (the “Manager of Managers Order”).

This Information Statement is being made available via the internet beginning on or about February 19, 2020 to all shareholders of record of the Fund as of February 5, 2020 (the “Record Date”).  The Information Statement will be available online at  http://www.franklintempleton.com/FLCBInfo until at least May 19, 2020.  A paper or e-mail copy of this Information Statement may be obtained, without charge, by contacting the Fund at (800) DIAL BEN/(800) 342-5236. 

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.  

Why am I receiving this Information Statement?

This Information Statement is being furnished to you by the Board to inform shareholders of a recent change in the investment management of the Fund.  The Board, upon the recommendation of Advisers, has approved a new sub-advisory agreement between Advisers and FT Institutional (the “New Sub-Advisory Agreement”).  Advisers and FT Institutional are both wholly owned subsidiaries of Franklin Resources, Inc. (“FRI”). This Information Statement provides details regarding FT Institutional, the New Sub-Advisory Agreement and the reasons the Board appointed FT Institutional as the new sub-advisor. 

What is the Manager of Managers Structure?

Following the appointment of FT Institutional as the sub-advisor, the Fund currently has one sub-advisor. FT Institutional provides Advisers with investment management advice (which may include research and analysis).  Pursuant to the Manager of Managers Order, Advisers has the ultimate responsibility, subject to oversight by the Board, to oversee the Fund’s sub-advisor(s) and recommend their hiring, termination and replacement. Advisers also, subject to the review and approval of the Board, sets the Fund’s overall investment strategy; evaluates, selects and recommends sub-advisor(s) to manage all or a portion of the Fund’s assets; and implements procedures reasonably designed to ensure that each sub-advisor complies with the Fund’s investment goal, policies and restrictions. Subject to review by the Board, Advisers may allocate and, when appropriate, reallocate the Fund’s assets among sub-advisors, and will monitor and evaluate each sub-advisor’s performance. 

The Fund, however, must comply with certain conditions when relying on the Manager of Managers Order.  One condition is that the Fund, by providing this Information Statement, inform shareholders of the hiring of any new wholly owned or unaffiliated sub-advisor within ninety (90) days after the hiring. 

APPOINTMENT OF FT INSTITUTIONAL AS THE SUB-ADVISOR TO THE FUND

Why was FT Institutional appointed as the New Sub-Advisor?

Advisers recommended, and the Board approved, the appointment of FT Institutional as the sub-advisor to the Fund to allow Amy Cooper to continue to serve as a portfolio manager to the Fund in her capacity as an employee of FT Institutional.

Has the addition of FT Institutional increased the Fund’s fees and expenses?

No.  The addition of FT Institutional as the sub-advisor to the Fund has had no impact on the investment management fees charged to the Fund or the fees paid by Fund’s shareholders, because the fees paid by Advisers to FT Institutional are deducted from the fees paid by the Fund to Advisers.  The addition of FT Institutional as the sub-advisor to the Fund has not materially changed the manner in which the Fund seeks to achieve its investment goal or the level of services that are provided to the Fund.

Information about FT Institutional

           FT Institutional, 280 Park Avenue, New York, NY 10017-1274, is a direct, wholly owned subsidiary of FRI.   Together, FT Institutional and its affiliates manage, as of January 31, 2020, $688 billion in assets, and have been in the investment management business since 1947. FRI is a publicly owned holding company with its principal offices located at One Franklin Parkway, San Mateo, California 94403-1906. The principal stockholders of FRI are Charles B. Johnson and Rupert H. Johnson, Jr., who owned approximately 20.9% and 21.0%, respectively, of its outstanding shares as of October 31, 2019. The shares deemed to be beneficially owned by Charles B. Johnson include certain shares held by three private charitable foundations for which he is a trustee, of which he disclaims beneficial ownership. The shares deemed to be beneficially owned by Rupert H. Johnson, Jr. include certain shares held by a private charitable foundation for which he is a trustee or by his spouse, of which he disclaims beneficial ownership.

The names and principal occupations of the principal executive officers and directors of FT Institutional, as of the Record Date, are set forth below. The business address of each person is 280 Park Avenue, New York, NY 10017-1274.

Craig S. Tyle is an officer of the Trust and FT Institutional.

material terms of the NEW sub-advisory agreement

Below is a summary of the material terms of the New Sub-Advisory Agreement. This summary is qualified in its entirety by reference to the New Sub-Advisory Agreement, a copy of which is attached as Exhibit B. The terms of the New Sub-Advisory Agreement are substantially identical to the terms and conditions of sub-advisory agreements previously approved by the Board for other series of the Trust with a sub-advisor providing discretionary investment advisory services.

Services.  Subject to the overall policies, direction and review of the Board and to the instructions and supervision of Advisers, FT Institutional provides certain investment advisory services with respect to securities, investments and cash equivalents in the Fund. Advisers will continue to have full responsibility for all investment advisory services provided to the Fund, including determining the manner in which any voting rights, right to consent to corporate action and any other rights pertaining to the investment securities within the Fund shall be exercised. Advisers and FT Institutional may place all purchase and sale orders on behalf of the Fund.

            Management Fees.  Advisers compensates FT Institutional for providing investment advice and analysis and for managing the Fund.  Advisers pays FT Institutional for its services from the investment management fees it receives from the Fund. 

Payment of Expenses. During the term of the New Sub-Advisory Agreement, FT Institutional will pay all expenses incurred by it in connection with the services to be provided by FT Institutional under the New Sub-Advisory Agreement other than the costs of securities (including brokerage commissions, if any) purchased for the Fund. Advisers and the Fund will be responsible for all of their respective expenses.

Brokerage.  In performing the services described above, FT Institutional shall use its best efforts to obtain for the Fund the most favorable price and execution available.  Subject to prior authorization of appropriate policies and procedures by the Board, FT Institutional may, to the extent authorized by law and in accordance with the terms of the Fund’s investment management agreement, prospectus and statement of additional information, cause the Fund to pay a broker who provides brokerage and research services an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, in recognition of the brokerage and research services that such broker provides, viewed in terms of either the particular transaction or FT Institutional’s overall responsibilities with respect to accounts managed by FT Institutional. 

Continuance.  The New Sub-Advisory Agreement will remain in effect for two years after its effective date of November 21, 2019, unless earlier terminated.  As provided therein, the New Sub-Advisory Agreement is thereafter renewable annually (i) by a vote of the Board or (ii) by a vote of a majority of the outstanding voting securities of the Fund, as defined in the Investment Company Act of 1940 (the “1940 Act”), provided that in either event the continuance is also approved by a vote of the majority of the Board who are not parties to the New Sub-Advisory Agreement or “interested persons,” as defined in the 1940 Act, of any party to the New Sub-Advisory Agreement or the Fund (“Independent Trustees”), by a vote cast at a meeting called for the purpose of voting on such approval.

            Termination.  The New Sub-Advisory Agreement may be terminated at any time, without payment of any penalty, (i) by the Board upon written notice to Advisers and FT Institutional or by vote of a majority of the outstanding voting securities of the Fund or (ii) by Advisers or FT Institutional upon at least sixty (60) days’ written notice to the other party. The New Sub-Advisory Agreement shall terminate automatically in the event of any assignment thereof, as defined in the 1940 Act, and upon any termination or assignment of the investment management agreement between Advisers and the Fund.

Standard of Care.  Under the New Sub-Advisory Agreement, in the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of its obligations or duties under the New Sub-Advisory Agreement on the part of FT Institutional or FT Institutional’s directors, officers, employees or affiliates shall not be held liable to Advisers, the Trust or the Fund, or to any shareholder of the Fund other than as set forth in the paragraph below. 

To the extent that Advisers is found by a court of competent jurisdiction, or the SEC or any other regulatory agency, to be liable to the Fund or any shareholder (a “liability”) for any acts undertaken by FT Institutional pursuant to authority delegated to it by Advisers, FT Institutional is required to indemnify and hold harmless Advisers and each of its affiliates, officers, directors and employees (each, a “Franklin Indemnified Party”) for any losses, damages, costs and expenses incurred by a Franklin Indemnified Party for such liability, together with all legal and other expenses reasonably incurred by any such Franklin Indemnified Party, in connection with such liability.

What factors did the Board consider when approving the New Sub-Advisory Agreement?

At the Meeting, the Board of Trustees, including a majority of the Independent Trustees, reviewed and approved the New Sub-Advisory Agreement for an initial two-year period. The Independent Trustees received advice from and met separately with Independent Trustee counsel in considering whether to approve the New Sub-Advisory Agreement. Advisers and FT Institutional are each referred to herein as a Manager. 

In considering the approval of the New Sub-Advisory Agreement, the Board reviewed and considered information provided by each Manager at the Meeting and throughout the year at meetings of the Board and its committees. The Board reviewed and considered all of the factors it deemed relevant in approving the New Sub-Advisory Agreement, including, but not limited to: (i) the nature, extent and quality of the services to be provided by FT Institutional as a sub-adviser to the Fund; (ii) the costs of the services to be provided by FT Institutional and the profits realized/expected to be realized by the Managers and their affiliates from the relationship with the Fund; and (iii) the extent to which economies of scale may be realized as the Fund grows. The Board also reviewed and considered the form of New Sub-Advisory Agreement and the terms of the New Sub-Advisory Agreement which were explained at the Meeting, noting that the terms and conditions of the New Sub-Advisory Agreement were substantially identical to the terms and conditions of the sub-advisory agreement previously approved by the Board for another series of the Trust with a sub-adviser providing discretionary investment advisory services. 

In approving the New Sub-Advisory Agreement, the Board, including a majority of the Independent Trustees, determined that the hiring of FT Institutional is in the best interests of the Fund and its shareholders and does not involve a conflict of interest from which Advisers or FT Institutional derives an inappropriate advantage. The Board also determined that the terms of the New Sub-Advisory Agreement are fair and reasonable and that the approval of such New Sub-Advisory Agreement is in the best interests of the Fund and its shareholders.  While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s determination.

Nature, Extent and Quality of Services

The Board reviewed and considered information regarding the nature, extent and quality of investment sub-advisory services to be provided by FT Institutional to the Fund and its shareholders. In doing so, the Board noted that the Fund employs a “manager of managers” structure pursuant to the Manager of Managers Order granted to Advisers by the SEC, whereby Advisers and the Fund may, without shareholder approval, enter into sub-advisory agreements with sub-advisers that are indirect or direct wholly owned subsidiaries of FRI. The Board also reviewed and considered, among other things, management’s representation that it was proposing that FT Institutional serve as a sub-adviser to the Fund to support Advisers in providing investment advice to the Fund in order to allow an existing portfolio manager to the Fund to continue to serve in her role upon the implementation of her expected employment status change from a dual employee of Advisers and FT Institutional to solely an employee of FT Institutional.  Following consideration of such information, the Board was satisfied with the nature, extent and quality of services to be provided by FT Institutional to the Fund and its shareholders under the New Sub-Advisory Agreement.

Fund Performance

The Board noted that the Fund commenced investment operations on September 17, 2019.  In light of the Fund’s brief operating history, the Board concluded that additional time is needed to evaluate the performance of the Fund.

Comparative Fees and Expenses

The Board reviewed and considered information regarding the proposed investment sub-advisory fee. In particular, the Board considered the fact that Advisers would compensate FT Institutional out of the fee paid to Advisers under the investment management agreement between Advisers and the Trust, on behalf of the Fund, and that the investment sub-advisory fee would not be an additional fee borne by the Fund.  The Board noted management’s representation that the addition of FT Institutional as a sub-adviser to the Fund will have no impact on the investment management fees paid by the Fund.  The Board concluded that the proposed investment sub-advisory fee for the Fund is reasonable.

Profitability

The Board then noted the fee waiver and expense limitations in effect for the Fund and that Adviser’s service as the Fund’s investment manager is not profitable at the Fund’s current asset level.  The Board also noted that the hiring of FT Institutional as an investment sub-adviser of the Fund would result in a decrease in the management fees retained by Advisers, if any.  The Board further noted that it reviewed and considered information showing the expected impact of retaining FT Institutional on the profitability of Advisers consistent with the conditions of the Manager of Managers Order.

Economies of Scale

The Board considered the extent to which FT Institutional and its affiliates may realize economies of scale, if any, and whether the Fund’s proposed investment sub-advisory fee structure reflects any economies of scale for the benefit of shareholders. The Board noted that Advisers (and their affiliates) could not report on any potential economies of scale at this time given the recent inception date of the Fund, but would be able to do so in connection with the Fund’s first annual contract renewal process.

Conclusion

Based on its review, consideration and evaluation of all factors it believed relevant, including the above-described factors and conclusions, the Board unanimously approved the New Sub-Advisory Agreement for the Fund for an initial two-year period.

ADDITIONAL INFORMATION ABOUT THE TRUST

The Investment Manager

Advisers currently serves as the Fund’s investment manager pursuant to an investment management agreement dated September 17, 2019, between the Trust, on behalf of the Fund, and Advisers (the “Management Agreement”).  The Management Agreement was initially approved by the Board, including the Independent Trustees, on September 6, 2019.  Advisers’ principal offices are located at One Franklin Parkway, San Mateo, California 94403-1906. Advisers is an indirect, wholly owned subsidiary of FRI. Further information about FRI and its principal shareholders can be found above under “INFORMATION ABOUT FT INSTITUTIONAL.”

The Trustees who are interested persons of Advisers or its affiliates and certain officers of the Trust who are shareholders of FRI are not compensated by the Trust or the Fund for their services, but may receive indirect remuneration due to their participation in management, advisory and other fees received by Advisers and its affiliates from the Fund.

The Trust employs Advisers to manage the investment and reinvestment of the Fund’s assets, to administer its affairs and to provide or procure, as applicable, administrative and other services, subject to the oversight of the Board.  Under the Management Agreement, Advisers has the authority to make all determinations with respect to the investment of the Fund’s assets and the purchase and sale of its investment securities. Advisers also may place orders for the execution of the Fund’s securities transactions. In addition, Advisers has the authority and discretion to delegate its investment management responsibilities through the appointment of one or more sub-advisors. In allocating the Fund’s assets, Advisers has discretion to not allocate any assets to one or more sub-advisors at any time.

The Fund pays Advisers a fee equal to an annual rate of 0.15% of the average daily net assets of the Fund for managing the Fund’s assets, including investment advisory services and Fund administration services. The fee is calculated daily and paid monthly according to the terms of the Management Agreement. 

Advisers has agreed to waive or limit its fees and to assume as its own certain expenses otherwise payable by the Fund so that expenses (including acquired fund fees and expenses (such as those associated with the Fund’s investment in a Franklin Templeton money fund), but excluding certain non-routine expenses) do not exceed 0.15% until July 31, 2021.

The Fund commenced operations on September 17, 2019 and has not yet completed a fiscal year.

The Administrator

The administrator for the Fund is Franklin Templeton Services, LLC (“FT Services”), with offices at One Franklin Parkway, San Mateo, California 94403-1906.  FT Services is an indirect, wholly owned subsidiary of FRI and an affiliate of Advisers and principal underwriter. Advisers pays FT Services a monthly fee equal to 105% of the internal costs incurred by FT Services for providing administrative services to the Fund. Advisers also reimburses FT Services for fees paid by FT Services to any third-party service provider for sub-administration and other services contemplated by the agreement between Advisers and FT Services. The fee is paid by Advisers and is not an additional expense of the Fund. State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111, has an agreement with FT Services to provide certain sub-administrative services for the Fund.

The Principal Underwriter

The principal underwriter for the Fund is Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403­1906.  The Board has adopted a plan pursuant to Rule 12b-1 for the Fund. However, no Rule 12b-1 plan fee is currently charged to the Fund.

The Transfer Agent

The transfer agent and dividend-paying agent for the Fund is State Street Bank and Trust Company, located at 1 Heritage Drive, Mail Stop OHD0100, North Quincy, MA 02171.