Rising Chinese stocks could drive further upside

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

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

What is FLCH’s strategy?

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

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

Why are Chinese stocks rising?

This week, China’s central bank announced its biggest economic stimulus since the COVID pandemic. Not only is China’s central bank cutting its benchmark interest rate by 0.2%, it is also lowering the level of cash that Chinese banks must hold in reserve and providing cash to Chinese financial institutions so that they can accelerate purchases of Chinese stocks. .

While some observers believe more needs to be done, the moves should help boost China’s economy and provide a boost 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 owns 952 stocks, and its top 10 holdings account for 44.9% of assets. You can check out an overview of the top 10 holdings of FLCH in the TipRanks holdings tool below.

It’s worth noting that while the fund is generally well-diversified, it has quite a bit of exposure to its main holding company, Tencent (TCEHY), which has a hefty 15.3% weighting 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 e-commerce stocks that have become household names to many US investors, such as Alibaba ( BABA ), PDD Holdings ( PDD ) and JD .com (JD). ). The fund is quite diversified when it comes to the sectors it has exposure to, as the largest share is represented by consumer discretionary (30.0%), followed by communications (19.9%) and financial (17.9%) ).

The rally has room to run

The main reason I think FLCH and its holdings should have plenty of room to run, even after the recent rally, is simply due to what I see as cheap valuations. Chinese stocks have faced numerous challenges over the years, but the FLCH portfolio trades at just a paltry 11.7 times trailing 12-month earnings, less than half the valuation of US stocks – the S&P 500 (SPX) trades for a 27x gain.

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

Tencent trades at just 15.9 times consensus December 2024 earnings estimates. Meanwhile, Alibaba, which had an off-cycle fiscal year, trades at an even cheaper 11 times March 2025 earnings estimate even after his latest growth. For comparison, Amazon ( AMZN ) trades for 2024 consensus earnings estimates of 41.1x, while Microsoft ( MSFT ) trades for June 2025 consensus estimates of 32.6x.

Fantastic smart scores

Another thing FLCH’s top 10 holdings have in common is a fantastic collection of smart scores. Smart Score is a quantitative stock scoring system created by TipRanks. It ranks 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 of FLCH’s top 10 holdings have Outperform-equivalent Smart Scores of eight or more, and incredibly, six of the top 10 have perfect 10 Smart Scores. You can see a list of the other TipRanks Top Smart Score stocks here.

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

Dividends are an added bonus

While not the main reason to invest in the ETF, FLCH also offers a 2.7% dividend yield, which is a nice added bonus for investors. What’s more, that return is twice that of the S&P 500, which currently has just 1.3%.

Best in class expense ratio

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

FLCH’s competitors, some of China’s largest ETFs, have 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) charge 0.70%.

Investors can see a comparison of FLCH against these peers using TipRanks’ ETF Comparison Tool. The fact that FLCH is much smaller than any of these ETFs, but has a significantly lower expense ratio, makes it a real hidden gem for investors.

FLCH has average performance behind

A word of caution amid the optimism is that FLCH (and Chinese stocks and ETFs in general) has underperformed before the recent run, so an investment with exposure to China is primarily a bet on a comeback. Chinese stocks remain substantially below levels of a few years ago.

Over the past five years, FLCH stock has generated a disappointing annualized total return of -3.5%, substantially underperforming the US market. By 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 think past performance creates an opportunity for new investors today. Given the cheap valuations of Chinese stocks and China’s apparent desire to boost growth (based on its large stimulus package), it seems reasonable to believe that the FLCH ETF can continue to move higher.

According to analysts, is FLCH stock a buy?

FLCH earns a consensus rating of Moderate Buy based on 160 buy ratings, 783 hold ratings and 10 sell ratings assigned in the past three months. FLCH’s average price target of $21.48 implies a potential upside of around 12% from current levels.

FLCH is an excellent choice to gain exposure to China

FLCH and the Chinese stocks it owns got a jolt from news of China’s recent stimulus plan. However, I think these stocks have plenty of room to run based on their cheap valuations. FLCH’s stock portfolio trades at less than half the price-to-earnings multiple of the S&P 500. Additionally, its exemplary diversification and best-in-class expense ratio make it an excellent choice for US investors looking to access China. I am bullish on FLCH.

Disclosure