Designed to provide broad exposure to the Financials ETFs category of the market, the First Trust Financials AlphaDEX ETF (
FXO Quick Quote FXO - Free Report) 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.
Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.
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.
This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.
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
The fund is managed by First Trust Advisors. FXO has been able to amass assets over $1.15 billion, making it one of the larger 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
Since cheaper funds tend to produce better results than more expensive funds, assuming all other factors remain equal, it is important for investors to pay attention to an ETF's expense ratio.
Operating expenses on an annual basis are 0.61% for FXO, making it one of the more expensive products in the space.
The fund has a 12-month trailing dividend yield of 2.15%.
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.
FXO's heaviest allocation is in the Financials sector, which is about 100% of the portfolio.
Taking into account individual holdings, Lpl Financial Holdings Inc. (
LPLA Quick Quote LPLA - Free Report) accounts for about 1.98% of the fund's total assets, followed by Alleghany Corporation and Mgic Investment Corporation ( MTG Quick Quote MTG - Free Report) .
The top 10 holdings account for about 17.62% of total assets under management.
Performance and Risk
So far this year, FXO has lost about -12.22%, and is down about -9.33% in the last one year (as of 09/05/2022). During this past 52-week period, the fund has traded between $37.52 and $48.61.
The fund has a beta of 1.10 and standard deviation of 33.99% for the trailing three-year period, which makes FXO a medium risk choice in this particular space. With about 101 holdings, it effectively diversifies company-specific risk.
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 Quick Quote VFH - Free Report) tracks MSCI US Investable Market Financials 25/50 Index and the Financial Select Sector SPDR ETF ( XLF Quick Quote XLF - Free Report) tracks Financial Select Sector Index. Vanguard Financials ETF has $8.69 billion in assets, Financial Select Sector SPDR ETF has $33.24 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.
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.