diff --git a/federation/pkg/federation-controller/service/servicecontroller.go b/federation/pkg/federation-controller/service/servicecontroller.go
index a73b6b5247..2ee7852fc0 100644
--- a/federation/pkg/federation-controller/service/servicecontroller.go
+++ b/federation/pkg/federation-controller/service/servicecontroller.go
@@ -664,6 +664,11 @@ func (s *ServiceController) getOperationsToPerformOnCluster(cluster *v1beta1.Clu
 				}
 			}
 		}
+		// If ExternalTrafficPolicy is not set in federated service, use the ExternalTrafficPolicy
+		// defaulted to in federated cluster.
+		if desiredService.Spec.ExternalTrafficPolicy == v1.ServiceExternalTrafficPolicyType("") {
+			desiredService.Spec.ExternalTrafficPolicy = clusterService.Spec.ExternalTrafficPolicy
+		}
 
 		// Update existing service, if needed.
 		if !Equivalent(desiredService, clusterService) {
diff --git a/test/e2e_federation/service.go b/test/e2e_federation/service.go
index 6ff708b59f..376b9f7a2c 100644
--- a/test/e2e_federation/service.go
+++ b/test/e2e_federation/service.go
@@ -379,10 +379,13 @@ func deleteServiceShard(c *fedframework.Cluster, namespace, service string) erro
 
 // equivalent returns true if the two services are equivalent.  Fields which are expected to differ between
 // federated services and the underlying cluster services (e.g. ClusterIP, NodePort) are ignored.
-func equivalent(federationService, clusterService v1.Service) bool {
-	clusterService.Spec.ClusterIP = federationService.Spec.ClusterIP
-	for i := range clusterService.Spec.Ports {
-		clusterService.Spec.Ports[i].NodePort = federationService.Spec.Ports[i].NodePort
+func equivalent(clusterService, federationService v1.Service) bool {
+	federationService.Spec.ClusterIP = clusterService.Spec.ClusterIP
+	for i := range federationService.Spec.Ports {
+		federationService.Spec.Ports[i].NodePort = clusterService.Spec.Ports[i].NodePort
+	}
+	if federationService.Spec.ExternalTrafficPolicy == v1.ServiceExternalTrafficPolicyType("") {
+		federationService.Spec.ExternalTrafficPolicy = clusterService.Spec.ExternalTrafficPolicy
 	}
 
 	if federationService.Name != clusterService.Name || federationService.Namespace != clusterService.Namespace {