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?
Products that are based on market cap weighted indexes, which are strategies designed to reflect a specific market segment or the market as a whole, have traditionally dominated the ETF industry.
Because market cap weighted indexes provide a low-cost, convenient, and transparent way of replicating market returns, they work well for investors who believe in market efficiency.
There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.
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.
Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.
Fund Sponsor & Index
FXO is managed by First Trust Advisors, and this fund has amassed over $1.32 billion, 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
For ETF investors, expense ratios are an important factor when considering a fund's return; in the long-term, cheaper funds actually have the ability to outperform their more expensive cousins if all other things remain the same.
Annual operating expenses for this ETF are 0.61%, making it one of the more expensive products in the space.
FXO's 12-month trailing dividend yield is 2.13%.
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.
This ETF has heaviest allocation in the Financials sector - about 100% of the portfolio.
When you look at individual holdings, Markel Corporation (MKL) accounts for about 1.97% of the fund's total assets, followed by Berkshire Hathaway Inc. (class B) (BRK/B) and Cincinnati Financial Corporation (CINF).
FXO's top 10 holdings account for about 17.73% of its total assets under management.
Performance and Risk
The ETF has lost about -10.32% and is down about -4.63% so far this year and in the past one year (as of 05/02/2022), respectively. FXO has traded between $41.42 and $48.61 during this last 52-week period.
FXO has a beta of 1.13 and standard deviation of 33.13% for the trailing three-year period, which makes the fund a medium risk choice in the space. With about 104 holdings, it effectively diversifies company-specific risk.
Alternatives
First Trust Financials AlphaDEX ETF is an excellent option for investors seeking to outperform the Financials ETFs segment of the market. There are other ETFs in the space which investors could consider as well.
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 $10.55 billion in assets, Financial Select Sector SPDR ETF has $36.86 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
Cincinnati Financial Corporation (CINF) : Free Stock Analysis Report
Markel Corporation (MKL) : Free Stock Analysis Report
Financial Select Sector SPDR ETF (XLF): ETF Research Reports
Vanguard Financials ETF (VFH): ETF Research Reports
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