Back to top

Image: Bigstock

Is First Trust Financials AlphaDEX ETF (FXO) a Strong ETF Right Now?

Read MoreHide Full Article

Designed to provide broad exposure to the Financials ETFs category of the market, the First Trust Financials AlphaDEX ETF (FXO - Free Report) is a smart beta exchange traded fund launched on 05/08/2007.

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.

Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.

If you're the kind of investor who would rather try and beat the market through good stock selection, then smart beta funds are your best choice; this fund class is known for tracking 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.

Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.

Fund Sponsor & Index

Because the fund has amassed over $1.12 billion, this makes it one of the larger ETFs in the Financials ETFs. FXO is managed by First Trust Advisors. Before fees and expenses, this particular fund 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

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.

Operating expenses on an annual basis are 0.61% for this ETF, which makes it one of the more expensive products in the space.

FXO's 12-month trailing dividend yield is 2.21%.

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.

For FXO, it has heaviest allocation in the Financials sector --about 100% of the portfolio.

Taking into account individual holdings, Markel Corporation (MKL - Free Report) 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 - Free Report) .

FXO's top 10 holdings account for about 17.73% of its total assets under management.

Performance and Risk

The ETF has lost about -14.65% so far this year and is down about -8.70% in the last one year (as of 07/06/2022). In the past 52-week period, it has traded between $37.52 and $48.61.

The fund has a beta of 1.13 and standard deviation of 33.92% for the trailing three-year period, which makes FXO a medium risk choice in this particular 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 - Free Report) tracks MSCI US Investable Market Financials 25/50 Index and the Financial Select Sector SPDR ETF (XLF - Free Report) tracks Financial Select Sector Index. Vanguard Financials ETF has $8.69 billion in assets, Financial Select Sector SPDR ETF has $29.51 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.

Published in