Is First Trust Financials AlphaDEX ETF (FXO) a Strong ETF Right Now?
Designed to provide broad exposure to the Financials ETFs category of the market, the First Trust Financials AlphaDEX ETF (FXO) is a smart beta exchange traded fund launched on 05/08/2007.
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.
Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.
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.
By attempting to pick stocks that have a better chance of risk-return performance, non-cap weighted indexes are based on certain fundamental characteristics, or a combination of such.
The smart beta space gives investors many different choices, from equal-weighting, one of the simplest strategies, to more complicated ones like fundamental and volatility/momentum based weighting. However, not all of these methodologies have been able to deliver remarkable returns.
Fund Sponsor & Index
Managed by First Trust Advisors, FXO has amassed assets over $897.94 million, making it one of the average sized ETFs in the Financials ETFs. Before fees and expenses, FXO seeks to match the performance of the StrataQuant Financials Index.
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
Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.
Operating expenses on an annual basis are 0.62% for this ETF, which makes it one of the more expensive products in the space.
FXO's 12-month trailing dividend yield is 3.09%.
Sector Exposure and Top Holdings
Most ETFs are very transparent products, and disclose their holdings on a daily basis. ETFs also offer diversified exposure, which minimizes single stock risk, though it's still important for investors to research a fund's holdings.
FXO's heaviest allocation is in the Financials sector, which is about 100% of the portfolio.
Looking at individual holdings, Janus Henderson Group Plc (JHG) accounts for about 2.09% of total assets, followed by Arch Capital Group Ltd. (ACGL) and Everest Re Group, Ltd. (RE).
Its top 10 holdings account for approximately 19.75% of FXO's total assets under management.
Performance and Risk
The ETF has lost about -15.33% so far this year and is down about -12.36% in the last one year (as of 05/15/2023). In the past 52-week period, it has traded between $33.55 and $46.46.
The ETF has a beta of 1.11 and standard deviation of 28.56% for the trailing three-year period, making it a medium risk choice in the space. With about 101 holdings, it effectively diversifies company-specific risk.
Alternatives
First Trust Financials AlphaDEX ETF is a reasonable option for investors seeking to outperform the Financials ETFs segment of the market. However, there are other ETFs in the space which investors could 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 $7.44 billion in assets, Financial Select Sector SPDR ETF has $29.20 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
Everest Re Group, Ltd. (RE) : Free Stock Analysis Report
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
