After several challenging years, the Chinese market is showing signs of life, and the Franklin FTSE China ETF (NYSEARCA:FLCH) looks like the most effective way to invest in this turnaround.
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I’m bullish on this overlooked $108.6 million ETF from Franklin Templeton based on its diversified exposure to Chinese stocks, highly-rated top holdings, attractive 3.5% dividend yield, and best-in-class expense ratio. Furthermore, Wall Street analysts see significant upside potential of nearly 30% for the China-focused ETF.
China looks like an attractive place to invest right now, as it could be in the early stages of a major rebound, and FLCH is the most attractive way to invest in it via an ETF.
What Is the FLCH ETF’s Strategy?
FLCH’s strategy is elegant in its simplicity. According to fund sponsor Franklin Templeton, FLCH “provides access to the Chinese stock market, allowing investors to precisely gain exposure to China at a low cost.”
China’s Comeback
After several years of struggling, China’s economy finally seems to be finding its footing and looks poised to bounce back.
China recently reported GDP growth for the first quarter of 2024, and while there has been a lot of doom and gloom surrounding China, the results were surprisingly compelling. GDP grew by 5.3% year-over-year, and this was more than pundits were expecting. Economists polled by Reuters expected growth of 4.6%. Not only did this represent strong year-over-year growth, but it was also sequential growth, as last quarter, China’s GDP grew by 5.2%.
Meanwhile, the country’s purchasing managers’ index (PMI) showed that manufacturing activity increased for the first time in six months, and a different survey had its highest reading in over a year. Much of this strength is coming from high-tech manufacturing and the production of electric vehicles (EVs), batteries, and solar panels.
To be clear, not everything in China looks rosy, as the property sector remains challenged (property investment was down 9.5%, and new property sales fell 27.6% during the quarter). However, things look better than they have in a long time, creating the opportunity to invest in what could be the very early stages of a new Chinese bull market.
FLCH: Highly-Rated Holdings
FLCH is super diversified; it holds 958 Chinese stocks, and its top 10 holdings account for a reasonable 39.9% of assets. Below, you’ll find an overview of FLCH’s top 10 holdings using TipRanks’ holdings tool.
In addition to ample diversification within China, FLCH also gives investors exposure to a highly-rated group of top holdings. Remarkably, nine out of 10 of FLCH’s top 10 holdings boast Outperform-equivalent Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
FLCH itself features an Outperform-equivalent ETF Smart Score of 8.
Not only are these holdings highly rated, but they are also incredibly cheap. FLCH’s holdings trade at an average price-to-earnings ratio of just 12.4x. This represents a significant discount to U.S. stocks, as the S&P 500 (SPX) trades at 22.6x earnings. This inexpensive valuation gives FLCH a more defensive posture and also leaves more runway for capital appreciation on the table.
Separating Itself from the Pack
Here’s where FLCH really separates itself from the competition: cost.
With a low expense ratio of just 0.19%, FLCH is an extremely cost-effective way to invest in China. This 0.19% expense ratio means that an investor allocating $10,000 to FLCH would pay just $19 in fees over the course of the year.
Not only is this a reasonable fee for an ETF in general, but it’s particularly favorable for an international ETF (as these ETFs tend to charge more), and it’s also significantly cheaper than the fees charged by other China-focused ETFs, FLCH’s main competitors.
For example, the much larger and more popular iShares MSCI China ETF (NASDAQ:MCHI), which has $4.7 billion in assets under management (AUM), charges a significantly higher 0.59%. Additionally, the Kraneshares CSI China Internet ETF (NYSEARCA:KWEB), the largest China ETF, which dwarfs FLCH with $6.0 billion in AUM, charges an even higher 0.69%. Finally, the iShares China Large-Cap ETF (NYSEARCA:FXI), which is also significantly larger with $4.4 billion in AUM, charges a significantly higher 0.74%.
To illustrate what an impact this difference in fees makes over time, consider how much an investor putting $10,000 into each fund will pay in total over the course of 10 years. If each fund retains its current expense ratio and returns 5% per year going forward, an investor in FLCH will pay $241 in fees over the course of the decade. Meanwhile, an investor in MCHI will pay $738, an investor in KWEB will pay $859, and an investor in FXI will pay $918 over the same time horizon.
It’s unclear why these three ETFs are so much more popular than FLCH (in terms of their AUM), given the massive disparities in cost, but it is to the advantage of FLCH’s investors.
FLCH Has an Attractive Dividend
FLCH further adds to its investment appeal with an ample dividend. The China-focused fund yields an attractive 3.3%. This is significantly higher than the average 1.4% yield of the S&P 500.
It also puts FLCH at the front of the pack when it comes to the other popular China ETFs. KWEB yields 1.7%, FXI offers a 3.0% yield, and MCHI’s 3.3% yield is on par with that of FLCH.
Is FLCH Stock a Buy, According to Analysts?
Turning to Wall Street, FLCH earns a Moderate Buy consensus rating based on 166 Buys, 782 Holds, and 11 Sell ratings assigned in the past three months. The average FLCH stock price target of $21.07 implies 29.2% upside potential.
The Best Way to Invest in the Newly Attractive Chinese Market
In conclusion, China looks like it is slowly but surely entering the early stages of an economic rebound, making inexpensive Chinese equities an attractive place to invest. I believe FLCH is the best way to invest in this theme, and I’m bullish on this underrated ETF based on its best-in-class expense ratio, attractive 3.5% dividend yield, and diversified portfolio of highly-rated Chinese stocks. Additionally, analysts see a considerable potential upside of over 30%.
