China's Stimulus Sparks Surge in Chinese Stocks: FLCH ETF Poised for Upside

The Chinese stock market has been on a tear following the announcement of a new economic stimulus plan by China's central bank. The Franklin FTSE China ETF (FLCH), which provides exposure to the Chinese equity market, is well-positioned to capitalize on this resurgence. With its diversified portfolio, low fees, and attractive valuation, FLCH could offer investors significant upside potential.

Unlocking the Potential of China's Stimulus-Fueled Rally

Decoding China's Stimulus Measures

China's central bank has unveiled its largest economic stimulus since the COVID-19 pandemic, taking several key steps to bolster the country's economy. The central bank has lowered its benchmark interest rate by 0.2% and reduced the level of cash that Chinese banks are required to hold in reserve. Additionally, the central bank is providing cash directly to Chinese financial institutions, enabling them to increase their purchases of Chinese equities. These measures are aimed at stimulating economic growth and supporting the Chinese stock market.

FLCH's Diversified Approach to Capturing China's Upside

The Franklin FTSE China ETF (FLCH) is an index fund that invests in a broad range of large-cap and mid-cap Chinese stocks. With 952 holdings, the fund offers investors strong diversification, with its top 10 holdings accounting for a reasonable 44.9% of assets. This diversification helps mitigate the risks associated with individual stock selection, providing a more balanced exposure to the Chinese market.

Tapping into China's Tech and Consumer Powerhouses

FLCH's portfolio is heavily weighted towards the consumer discretionary (30.0%), communications services (19.9%), and financials (17.9%) sectors. This exposure allows the fund to capitalize on the growth of China's tech giants, such as Tencent, Alibaba, and JD.com, as well as the rising consumer spending power within the country. By diversifying across these key sectors, FLCH offers investors a well-rounded way to participate in China's economic transformation.

Valuation Advantage: Chinese Stocks Trading at a Discount

One of the primary reasons for FLCH's potential upside is the attractive valuation of its underlying holdings. The fund's portfolio trades at just 11.7x trailing 12-month earnings, which is less than half the valuation of the S&P 500 at 27x. This valuation gap presents a compelling opportunity for investors, as Chinese stocks have faced numerous challenges in recent years but now appear poised for a rebound.

Outperform-Equivalent Smart Scores Across FLCH's Holdings

Another standout feature of FLCH's portfolio is the exceptional Smart Scores of its top holdings. The Smart Score is a quantitative stock scoring system created by TipRanks, and it rates stocks on a scale of 1 to 10, with scores of 8, 9, or 10 considered equivalent to an Outperform rating. Remarkably, nine out of FLCH's top 10 holdings have Outperform-equivalent Smart Scores of 8 or above, and six of them have perfect 10 Smart Scores. This suggests that the fund's underlying stocks are highly regarded by the market and have the potential to outperform.

FLCH's Competitive Advantage: Low Expense Ratio

FLCH stands out from its competitors in the China ETF space due to its exceptionally low expense ratio of just 0.19%. This means that an investor allocating $10,000 into FLCH will pay only $19 in annual fees, making it a highly cost-effective option for gaining exposure to the Chinese market. In contrast, some of FLCH's larger peers, such as the iShares China Large Cap ETF (FXI) and the iShares China MSCI ETF (MCHI), charge significantly higher expense ratios of 0.75% and 0.59%, respectively.

Dividend Yield: An Added Bonus for Investors

While not the primary reason to invest in FLCH, the fund's dividend yield of 2.7% is an attractive added bonus for investors. This yield is twice the current yield of the S&P 500, which stands at only 1.3%, providing an additional source of income for FLCH investors.

Cautionary Note: FLCH's Recent Underperformance

It's important to note that FLCH and Chinese stocks, in general, have faced underwhelming performance in recent times, with the fund generating a disappointing annualized total return of -3.5% over the past five years. This underperformance is in stark contrast to the strong returns of the broader U.S. market, as represented by the Vanguard S&P 500 ETF (VOO), which produced a 15.9% annualized return over the same period.However, this prior underperformance may now present an opportunity for new investors. With Chinese stocks trading at attractive valuations and the Chinese government's apparent commitment to stimulating the economy, it seems reasonable to believe that FLCH and its holdings could continue to move higher, potentially offering investors significant upside potential.