Is First Trust Financials AlphaDEX ETF (FXO) a Strong ETF Right Now?
The First Trust Financials AlphaDEX ETF (FXO) was launched on 05/08/2007, and is a smart beta exchange traded fund designed to offer broad exposure to the Financials ETFs category of the market.
What Are Smart Beta ETFs?
Market cap weighted indexes were created to reflect the market, or a specific segment of the market, and the ETF industry has traditionally been dominated by products based on this strategy.
A good option for investors who believe in market efficiency, market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns.
However, some investors believe in the possibility of beating the market through exceptional stock selection, and choose a different type of fund that tracks non-cap weighted strategies: smart beta.
These indexes attempt to select stocks that have better chances of risk-return performance, based on certain fundamental characteristics or a combination of such characteristics.
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 $1.96 billion, making it one of the larger 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.
Annual operating expenses for FXO are 0.62%, which makes it one of the more expensive products in the space.
It has a 12-month trailing dividend yield of 2.64%.
Sector Exposure and Top Holdings
While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
Representing 100% of the portfolio, the fund has heaviest allocation to the Financials sector.
Looking at individual holdings, Evercore Inc. (EVR) accounts for about 1.81% of total assets, followed by Onemain Holdings, Inc. (OMF) and Franklin Resources, Inc. (BEN).
Its top 10 holdings account for approximately 17.39% of FXO's total assets under management.
Performance and Risk
The ETF has lost about -5.44% and is down about -8.60% so far this year and in the past one year (as of 03/13/2023), respectively. FXO has traded between $36.81 and $47.07 during this last 52-week period.
FXO has a beta of 1.13 and standard deviation of 34.17% for the trailing three-year period, which makes the fund a medium risk choice in the space. With about 102 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 $8.17 billion in assets, Financial Select Sector SPDR ETF has $30.70 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
Franklin Resources, Inc. (BEN) : Free Stock Analysis Report
Evercore Inc (EVR) : Free Stock Analysis Report
Financial Select Sector SPDR ETF (XLF): ETF Research Reports
Vanguard Financials ETF (VFH): ETF Research Reports
OneMain Holdings, Inc. (OMF) : Free Stock Analysis Report
