Is First Trust Financials AlphaDEX ETF (FXO) a Strong ETF Right Now?
A smart beta exchange traded fund, the First Trust Financials AlphaDEX ETF (FXO) debuted on 05/08/2007, and offers broad exposure to the Financials ETFs category of the market.
What Are Smart Beta ETFs?
For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.
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.
Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.
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
The fund is managed by First Trust Advisors. FXO has been able to amass assets over $1.15 billion, making it one of the average sized ETFs in the Financials ETFs. This particular fund, before fees and expenses, 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
When considering an ETF's total return, expense ratios are an important factor. And, cheaper funds can significantly outperform their more expensive cousins in the long term if all other factors remain equal.
Operating expenses on an annual basis are 0.61% for FXO, making it on par with most peer products in the space.
FXO's 12-month trailing dividend yield is 2.28%.
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.
Representing 99.70% of the portfolio, the fund has heaviest allocation to the Financials sector.
Taking into account individual holdings, Coinbase Global, Inc. (class A) (COIN) accounts for about 2.80% of the fund's total assets, followed by Jefferies Financial Group Inc. (JEF) and Lpl Financial Holdings Inc. (LPLA).
The top 10 holdings account for about 18.41% of total assets under management.
Performance and Risk
The ETF has lost about -8.73% so far this year and is down about -11.24% in the last one year (as of 11/08/2022). In the past 52-week period, it has traded between $36.81 and $48.61.
FXO has a beta of 1.11 and standard deviation of 34.68% for the trailing three-year period, which makes the fund a medium risk choice in the space. With about 101 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 $9 billion in assets, Financial Select Sector SPDR ETF has $31.49 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
Jefferies Financial Group Inc. (JEF) : Free Stock Analysis Report
LPL Financial Holdings Inc. (LPLA) : Free Stock Analysis Report
Financial Select Sector SPDR ETF (XLF): ETF Research Reports
Vanguard Financials ETF (VFH): ETF Research Reports
Coinbase Global, Inc. (COIN) : Free Stock Analysis Report
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