Is First Trust Financials AlphaDEX ETF (FXO) a Strong ETF Right Now?
Making its debut on 05/08/2007, smart beta exchange traded fund First Trust Financials AlphaDEX ETF (FXO) provides investors broad exposure to the Financials ETFs category of the market.
What Are Smart Beta ETFs?
The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.
Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.
But, there are some investors who would rather invest in smart beta funds; these funds track non-cap weighted strategies, and are a strong option for those who prefer choosing great stocks in order to beat the market.
Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.
This area offers many different investment choices, such as simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies; however, not all of these strategies can deliver superior results.
Fund Sponsor & Index
FXO is managed by First Trust Advisors, and this fund has amassed over $878.91 million, which makes it one of the average sized ETFs in the Financials ETFs. This particular fund seeks to match the performance of the StrataQuant Financials Index before fees and expenses.
The StrataQuant Financials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.
Cost & Other Expenses
Since cheaper funds tend to produce better results than more expensive funds, assuming all other factors remain equal, it is important for investors to pay attention to an ETF's expense ratio.
Annual operating expenses for FXO are 0.62%, which makes it one of the more expensive products in the space.
The fund has a 12-month trailing dividend yield of 3.13%.
Sector Exposure and Top Holdings
It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
FXO's heaviest allocation is in the Financials sector, which is about 100% of the portfolio.
When you look at individual holdings, Janus Henderson Group Plc (JHG) accounts for about 2.09% of the fund's total assets, followed by Arch Capital Group Ltd. (ACGL) and Everest Re Group, Ltd. (RE).
FXO's top 10 holdings account for about 19.75% of its total assets under management.
Performance and Risk
The ETF has lost about -3.73% so far this year and is up roughly 6.11% in the last one year (as of 07/17/2023). In the past 52-week period, it has traded between $33.55 and $46.46.
The fund has a beta of 1.11 and standard deviation of 25.92% for the trailing three-year period, which makes FXO a medium risk choice in this particular space. With about 101 holdings, it effectively diversifies company-specific risk.
Alternatives
First Trust Financials AlphaDEX ETF is not a suitable option for investors seeking to outperform the Financials ETFs segment of the market. Instead, there are other ETFs in the space which investors should consider.
Vanguard Financials ETF (VFH) tracks MSCI US Investable Market Financials 25/50 Index and the Financial Select Sector SPDR ETF (XLF) tracks Financial Select Sector Index. Vanguard Financials ETF has $8.10 billion in assets, Financial Select Sector SPDR ETF has $33.11 billion. VFH has an expense ratio of 0.10% and XLF charges 0.10%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Financials ETFs.
Bottom Line
To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.
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First Trust Financials AlphaDEX ETF (FXO): ETF Research Reports
Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report
Financial Select Sector SPDR ETF (XLF): ETF Research Reports
Vanguard Financials ETF (VFH): ETF Research Reports
Janus Henderson Group plc (JHG) : Free Stock Analysis Report
