FLCH ETF: Surging Chinese Stocks Could Drive More Upside Ahead 

Chinese stocks are surging after China announced a new stimulus plan, and the China-focused Franklin FTSE China ETF (FLCH) could have plenty of upside ahead. 

We were positive on FLCH earlier this year and the ETF has performed well since then, but I continue to believe there is more upside ahead. I’m bullish on FLCH based on the newly unveiled stimulus for the Chinese market, the modest valuation of its holdings, its diversification, and its low fees. 

What is the FLCH’s Strategy? 

According to Franklin Templeton, FLCH “provides access to the Chinese stock market, allowing investors to precisely gain exposure to China at a low cost.”

FLCH is an index fund that invests in large-cap and mid-cap Chinese stocks.  

Why are Chinese Stocks Soaring?

This week, China’s central bank announced its largest economic stimulus since the COVID pandemic. Not only is China’s central bank lowering its benchmark interest rate by 0.2%, it is also lowering the level of cash that Chinese banks are required to hold in reserve and giving cash to Chinese financial institutions so that they can ramp up their purchases of Chinese equities.

While some observers feel more needs to be done, the moves should help to boost China’s economy and provide a lift to Chinese stocks. Fellow TipRanks writer Sheryl Sheth presented a list of highly rated Chinese stocks a few months ago.

A Look at FLCH’s Holdings 

FLCH offers investors strong diversification. The fund holds 952 stocks, and its top 10 holdings account for a reasonable 44.9% of assets. You can check out an overview of FLCH’s top 10 holdings from TipRanks’ holdings tool below.   

It’s worth noting is that while the fund is generally well-diversified, it has quite a large exposure to its top holding, Tencent (TCEHY), which carries a large weighting of 15.3% due to that company’s massive size. 

In addition to Tencent, the fund’s top holdings include many of the other large-cap Chinese internet and ecommerce stocks that have become household names to many U.S. investors such as Alibaba (BABA), PDD Holdings (PDD), and JD.com (JD). The fund is fairly diversified when it comes to the sectors it has exposure to, as consumer discretionary makes up the largest weighting (30.0%), followed by communications services (19.9%) and financials (17.9%).   

The Rally has Room to Run 

The primary reason why I believe that FLCH and its holdings should have plenty of room to run, even after the recent rally, is quite simply due to what I see as cheap valuations. Chinese stocks have faced numerous challenges over the years, but FLCH’s portfolio trades at just a paltry 11.7x trailing 12-month earnings, less than half the valuation of U.S. stocks — the S&P 500 (SPX) trades for a much higher 27x trailing earnings.  

Comparing some of FLCH’s top holdings to their U.S. peers really hammers this point home. This isn’t an apples-to-apples comparison, as Chinese tech giants often face more regulatory hurdles than their U.S. peers, but the numbers puts things into perspective.

Tencent trades at just 15.9x consensus December 2024 earnings estimates. At the same time, Alibaba, which has had an off-cycle fiscal year, trades at an even cheaper 11x March 2025 earnings estimates even after its recent run higher. For comparison, Amazon (AMZN) trades for 41.1x consensus 2024 earnings estimates while Microsoft (MSFT) trades for 32.6x June 2025 consensus estimates.  

Fantastic Smart Scores 

Another thing that FLCH’s top 10 holdings have in common is a fantastic collection of Smart Scores. The Smart Score is a quantitative stock scoring system created by TipRanks. It scores stocks from one to 10, based on eight key market factors. Scores of eight, nine, or 10 are considered equivalent to an Outperform rating.

Nine out of FLCH’s top 10 holdings feature Outperform-equivalent Smart Scores of eight or above, and incredibly, six out of the top 10 have perfect 10 Smart Scores. You can check out a list of TipRanks’ other Top Smart Score stocks here.  

Additionally, FLCH itself earns an Outperform-equivalent ETF Smart Score of eight. 

Dividend is an Added Bonus

While it’s not the primary reason to invest in the ETF, FLCH also offers a dividend yield of 2.7%, which is a nice added bonus for investors. Furthermore, this yield is twice that of the S&P 500, which currently yields only 1.3%.  

Best-in-Class Expense Ratio 

Another standout feature of FLCH is its low expense ratio of just 0.19%. This means that an investor allocating $10,000 into FLCH will pay just $19 in fees on an annual basis. This is a very reasonable fee for an international ETF, which usually have higher expense ratios than domestic ETFs. 

FLCH’s competitors, some of the largest China ETFs, feature much higher expense ratios. For example, the iShares China Large Cap ETF (FXI) has a significantly higher ETF expense ratio of 0.75%, while the iShares China MSCI ETF (MCHI) charges 0.59% and the KraneShares CSI Internet ETF (KWEB) charges 0.70%. 

Investors can view a comparison of FLCH versus these peers using TipRanks’ ETF Comparison Tool. The fact that FLCH is much smaller than any of these ETFs but features a significantly lower expense ratio makes it a true hidden gem for investors. 

FLCH Has Lagging Medium Performance 

One word of warning amidst the optimism is that FLCH (and Chinese stocks and ETFs more generally) has posted underwhelming performance prior to the recent run, so an investment exposed to China is primarily a bet on a rebound. Chinese equities remain substantially below levels from a few years ago.

Over the past five years, FLCH stock has generated a disappointing annualized total return of -3.5%, substantially underperforming U.S. market returns. For comparison, the broad market Vanguard S&P 500 ETF (VOO) produced a far superior 15.9% annualized return over the same five-year time frame. 

That said, I believe the prior underperformance creates an opportunity for new investors today. Given the inexpensive valuations of Chinese stocks and China’s apparent desire to spur growth (based on the large stimulus package), it seems reasonable to believe that the FLCH ETF can continue to move higher. 

Is FLCH Stock a Buy, According to Analysts?

FLCH earns a Moderate Buy consensus rating based on 160 Buy ratings, 783 Hold ratings, and 10 Sell ratings assigned in the past three months. The average FLCH stock price target of $21.48 implies about 12% upside potential from current levels.

FLCH Is a Great Choice for Gaining Exposure to China 

FLCH and the Chinese stocks it holds received a jolt from news of China’s recent stimulus plan. However, I believe these stocks have plenty of room to run based on their inexpensive valuations. FLCH’s portfolio of stocks trades for just under half the price-to-earnings multiple of the S&P 500. Additionally, its exemplary diversification and best-in-class expense ratio make it a great choice for U.S. investors looking to tap into China. I’m bullish on FLCH.

Disclosure