4 Reasons To Consider The FLCH ETF

seekingalpha08-03

FTSE Franklin China ETF has had a choppy 2024, with only a little over 1% increase YTD.FLCH is a well-rounded product with a lower expense ratio, more stability, wider stock coverage, and a better ...

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K-King Photography Media Co. Ltd Introduction The FTSE Franklin China ETF (NYSEARCA:FLCH), a +$100m-sized ETF that provides exposure to 950 Chinese stocks (91% large-cap exposure), has experienced quite a choppy 2024 so far; just a few months back, it was leading global stocks with positive returns in the low teens, but much of the gains appear to have dissipated in recent months. On a YTD basis, FLCH has only increased by a little over 1%.   YCharts Despite an underwhelming seven months in 2024, we still see a few silver linings and believe FLCH could be more rewarding in the months ahead. Nonetheless, here are a few broad reasons why we’re optimistic about FLCH. A Well-Rounded Product Even though FLCH may be one of the more recent Chinese-focused products (established only in November 2017), we still feel it is one of the better ways to gain access to Chinese stocks. To drive home this point, do note how well this product fares against the most popular Chinese-themed equity ETF around - The iShares MSCI China ETF (MCHI) which has accumulated 42x the AUM that our focus ETF has garnered. MCHI of course, got listed more than 6 years before FLCH. FLCH covers a wider pool of stocks (over 950 as opposed to 680) and can be accessed at a much cheaper rate. FLCH’s expense ratio of 0.19% is more than 3x lower than MCHI’s corresponding ratio, and you’d also be interested to note that FLCH is also the cheapest Chinese-focused ETF in the market. FLCH is also a bit more stable than MCHI with an annual churn ratio of less than 10%; MCHI’s corresponding figure is over 300bps higher. Our focus ETF would likely appeal to more risk-averse investors, as its rolling volatility ratio is around 140bps lower than MCHI’s corresponding figure.   YCharts Finally, FLCH also appears to be developing a much better income angle; even though both products have offered similar yields over time (4-year average), note that FLCH’s current yield is more attractive than MCHI’s figure; over the last 3 years, FLCH has expanded its payouts at a much faster pace (over 21%) relative to MCHI (only 15%). Green Shoots In the Macro Backdrop A little over 2 weeks ago, the IMF released its latest economic outlook report, and one of the standout developments was the lifting of Chinese GDP growth for both this year and next year by 0.4%. The upward revision was even better than India’s revision, and represented the largest increase for any major region, besides Spain.   IMF Economic Outlook-July 2024 Over the last few years, investors' and economists' sentiment toward China has been decimated, and a lot of them are viewing the economy through a glass-half-empty lens. However, a lot of these observers are underestimating the impact of policy stimulus, which can cause some wild surprises to the end data. For instance, consumption, which contributes around 60% to Chinese GDP growth, is poised to benefit from incremental countercyclical policy support through the rest of the year, as the government attempts to defend its 5% GDP growth target. Even otherwise, investors should note that confidence levels of Chinese consumers have picked up sequentially, which is not quite the case in other regions of the Asia-Pacific. This bodes well for spending conditions through the rest of the year, and FLCH per se, too, stands to benefit as consumer discretionary stocks account for the largest stake (28%) in the portfolio.   McKinsey FLCH’s Top Holding – Tencent, Is Set To Benefit From Multiple Tailwinds Even though FLCH covers over 950 stocks, only one stock in the portfolio enjoys a double-digit weighting. We’re referring to Tencent (OTCPK:TCEHY) which accounts for over 14% of the total portfolio alone, a good 600bps more than the next largest stock. If TCEHY doesn’t fare well, it will be difficult for FLCH to flourish. Fortunately, we believe things are looking up for TCEHY. After the regulatory fiasco in 2022, it has been steadily gaining ground with 5 straight quarters of positive topline growth. A lot of investors are now waiting for its major profit engine - the gaming business, to start picking up the baton, and we feel management’s strategy of revamping some of its key games will start to pay off in the quarters ahead. In addition to that, we also expect Tencent’s ‘Dungeon and Fighter’ (DnF) mobile game to provide a useful fillip to this segment. Getting this over the regulatory line had taken years, but after launching it in May, it’s fair to say that it has been a resounding success, with it crossing $100m in sales in just 10 days, and boosting mobile gaming revenue by 12% just in May. Even though the gaming division may not yet be firing on all fronts, note that FLCH’s profitability for the year, is still expected to grow at a sturdy pace of 33%.   Seeking Alpha For a business generating 30%+ earnings growth, a forward P/E of just 15.3x feels like great value, more so as that multiple also represents a 43% discount to its long-term average. These compelling valuations should help in driving interest towards the stock.   Seeking Alpha We also feel that TCEHY's cash-compounding prowess will continue to attract positive interest. On a trailing twelve-month basis, FLCH is currently generating record levels of FCF (over $26.5bn), with its current FCF yield of ~6% almost double the level of its 10-year average.   YCharts Closing Thoughts - Prospective Mean-Reversion, Cheap Valuations, and Favorable Technical Developments The relative strength charts of global stocks serve as a useful tool in ascertaining some of the more beaten-down terrains that could benefit from prospective mean-reversion momentum in the months ahead.   YCharts The chart above shows how FLCH’s portfolio of Chinese stocks is currently one of the most oversold groups in the world with its current relative strength ratio almost at record lows, and roughly only half as much as its long-term average. Bargain-hunters could likely take a fancy towards FLCH as its valuation looks exceedingly cheap; as things stand, the ETF’s holdings are priced at a weighted average P/E of just 10.4x, but yet offer long-term earnings growth potential (10%) that is roughly on part with that multiple! Contrast that with global stocks, which only offer a little over a percentage more of earnings growth, but are priced at well over a 70% premium on a P/E basis.   Morningstar Switching over to FLCH’s weekly chart, we feel quite enthused with what we see. Firstly, note that the price imprints over the last two-and-a-half years have taken the form of a falling wedge pattern, which is essentially a reversal pattern.   Investing Then, earlier in the year, we saw FLCH form a double-bottom at around the $14 levels, and after some congestion (area highlighted in red) from Feb to April, it kicked on before facing some resistance at the wedge boundary. There’s been some decent retracement since moving away from the wedge boundary, and now the price has dropped back to its old congestion zone, which could serve as an intermediate bottom of sorts. All in all, we wouldn’t be averse to considering a long position around current levels.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2456268983"}