For investors looking to gain exposure to Chinese stocks, the Franklin FTSE China ETF (NYSEARCA:FLCH) is a hidden gem in a crowded field of over 50 China-focused ETFs.
With just $106.0 million in assets under management (AUM), it is far smaller than the leading ETFs in the space, but it stands out from the crowd as an attractive fund due to its low expense ratio and the broad, diversified China exposure that it provides to investors thanks to the fact that it owns 954 Chinese stocks.
I’m constructive on FLCH for these reasons, plus the fact that it has an above-average dividend yield, a strong Smart Score from TipRanks, and a favorable outlook from Wall Street analysts.
What is the FLCH ETF’s Strategy?
Franklin Templeton says that FLCH “provides access to the Chinese stock market, allowing investors to precisely gain exposure to China at a low cost.” The fund “provides targeted exposure to large- and mid-sized companies in China.”
The ETF launched in 2017, and it is a relatively small fund with just $106.0 million in assets under management (AUM).
All-Encompassing Portfolio
FLCH differentiates itself from the pack by offering comprehensive, all-encompassing exposure to the Chinese market.
Prominent Chinese ETFs like the KraneShares CSI China Internet ETF (NYSEARCA:KWEB) and the iShares China Large-Cap ETF (NYSEARCA:FXI) focus on the large-cap Chinese household names (while skewing heavily towards China’s tech sector) and hold 32 and 50 stocks, respectively. The more inclusive iShares MSCI China ETF (NASDAQ:MCHI) has 644 holdings.
But FLCH trumps them all with 954 holdings. Furthermore, its top 10 holdings account for just 40.0% of the fund.
The table below gives you an overview of FLCH’s top 10 holdings using TipRanks’ holdings tool.
FLCH’s top holdings feature some impressive 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.
Top holding Tencent (OTC:TCEHY), second-largest holding Alibaba (NYSE:BABA), and four more top holdings, PDD Holdings (NASDAQ:PDD), Netease (NASDAQ:NTES), Baidu (NASDAQ:BIDU), and Ping An Insurance (OTC:PIAIF) all feature ‘Perfect 10’ Smart Scores.
Outside of these top 10 positions, additional prominent holdings within FLCH’s portfolio that feature perfect Smart Scores include electric vehicle makers like BYD (OTC:BYDDF) and Li Auto (NASDAQ:LI), electronics company Xiaomi Corporation (OTC:XIACF) and Yum China (NYSE:YUMC), which owns, operates and franchises brands including KFC, Pizza Hut, and Taco Bell in China.
The Smart Score is also a fan of the FLCH ETF in general, giving it an ETF Smart Score of 8.
In addition to featuring strong Smart Scores, these Chinese stocks that FLCH holds are attractive because they trade at a significant discount to their U.S. market peers. For example, as of November 27th, FLCH’s portfolio had an average price-to-earnings ratio of just 12.7 versus a price-to-earnings ratio of 20.4 for the S&P 500 (SPX).
Cost-Effective Expense Ratio
Where FLCH really stands out is its low 0.19% expense ratio. Investing in China is often an expensive undertaking for investors located outside of the country, but you wouldn’t know it by looking at FLCH.
This expense ratio means that an investor putting $10,000 into FLCH would pay just $19 in fees over a one-year period. Assuming that FLCH returns 5% a year and keeps this 0.19% expense ratio, this investor would pay just a reasonable $241 in fees over the course of 10 years.
This compares favorably to the top China ETFs in the market. For example, the three largest China ETFs, the aforementioned MCHI, KWEB, and FXI, all charge considerably higher expense ratios of 0.59%, 0.69%, and 0.74%, respectively.
Investors putting the same $10,000 into these funds would pay $59, $69, and $74, respectively, in fees in one year.
These fees compound over time, illustrating the advantages of investing in a low-cost ETF like FLCH. While the aforementioned FLCH investor would pay $241 in fees over a 10-year timeframe, the MCHI investor would pay $726, the KWEB investor would pay $859, and the FXI investor would pay $918 over the same time span.
Below, you can check out a comparison between FLCH and these three larger peers using TipRanks’ ETF Comparison Tool, which allows investors to compare up to 20 ETFs at a time on a variety of criteria.
Does FLCH Pay a Dividend?
In addition to this favorable expense ratio, FLCH is also appealing because of its above-average dividend yield. FLCH yields 3.3%, which is roughly double the yield of the S&P 500 (SPX).
Note that FLCH pays this dividend on a semiannual basis, once in June and once in December, as opposed to the quarterly basis that many U.S. investors are accustomed to. FLCH has paid dividends to its holders each year since its inception in 2017.
Is FLCH Stock a Buy, According to Analysts?
Turning to Wall Street, FLCH earns a Moderate Buy consensus rating based on 151 Buys, 798 Holds, and six Sell ratings assigned in the past three months. The average FLCH stock price target of $22.20 implies 32.9% upside potential.
A Sensible, Low-Cost Option
FLCH is an attractive option for investors who want to gain exposure to the Chinese market. This cost-effective China ETF leaves more money in investors’ pockets with its investor-friendly expense ratio of just 0.19%, which is considerably better than the expense ratios offered by its much larger peers.
FLCH also stands out because it offers significant diversification and wide-reaching exposure to the Chinese market with 954 holdings, many more than any of its peers.
FLCH also features an attractive, above-average dividend yield of 3.2%, and it receives favorable ratings from both TipRanks’ Smart Score system and Wall Street analysts. For U.S.-based investors, adding some exposure to China via an ETF like FLCH is a good way to diversify outside of one’s home market, which helps spread out risk and can allow investors to tap into new growth opportunities.
Overall, there’s a lot to like about this sensible, well-run, and under-the-radar China ETF, and I am bullish on this hidden gem.
