cfn-init for cloudformation launchtemplate

cfn-init should only be used if you define some initialisation steps for your instance in the cloudformation template itself.

The cfn-init scripts tells cloudformation to read your configuration steps from the template definition (the AWS::CloudFormation::Init section) and to 'execute' them on the instance.

You can also bootstrap your instance by passing a shell script in the user-data section.

In your case, as I can not see any bootstrap configuration steps defined in your YAML file, there is no need to call cfn-init in your user-data script.

More about cfn-init : https://docs.aws.amazon.com/AWSCloudFormation/latest/UserGuide/cfn-init.html

More about AWS::CloudFormation::Init : https://docs.aws.amazon.com/AWSCloudFormation/latest/UserGuide/aws-resource-init.html

I had the metadata at the wrong nesting level, it should be at topmost level along with Type: and Properties:, not under Properties:LaunchTemplateData:.

LaunchTemplate:
  Type: AWS::EC2::LaunchTemplate
  Metadata: 
    AWS::CloudFormation::Init: 
      config:
        files:
          /var/www/html/index2.html:
            content: TestString
  Properties:
    LaunchTemplateData: 
      SecurityGroupIds: 
        - !GetAtt DMZSecurityGroup.GroupId
        - !GetAtt ECSSecurityGroup.GroupId
      UserData:
        Fn::Base64:
          !Sub |
            #!/bin/bash -xe
            yum update -y aws-cfn-bootstrap
            /opt/aws/bin/cfn-init -v --stack ${AWS::StackName} --resource ECSLaunchTemplate --region ${AWS::Region}
            yum -y update