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

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The First Trust Financials AlphaDEX ETF (FXO - Free Report) made its debut on 05/08/2007, and is a smart beta exchange traded fund that provides broad exposure to the Financials ETFs category of the market.

What Are Smart Beta ETFs?

The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.

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.

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.

Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other 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

The fund is managed by First Trust Advisors, and has been able to amass over $2.23 billion, which makes it one of the larger ETFs in the Financials ETFs. FXO, 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

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 on par with most peer products in the space.

It has a 12-month trailing dividend yield of 1.90%.

Sector Exposure and Top Holdings

It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. 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, Jefferies Financial Group Inc. (JEF - Free Report) accounts for about 2% of the fund's total assets, followed by The Goldman Sachs Group, Inc. (GS - Free Report) and White Mountains Insurance Group Ltd. (WTM - Free Report) .

FXO's top 10 holdings account for about 17.56% of its total assets under management.

Performance and Risk

So far this year, FXO has added roughly 3.75%, and it's up approximately 29.70% in the last one year (as of 02/18/2025). During this past 52-week period, the fund has traded between $43.89 and $59.

FXO has a beta of 1.15 and standard deviation of 22.95% 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 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 - 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 $12.46 billion in assets, Financial Select Sector SPDR ETF has $54.03 billion. VFH has an expense ratio of 0.09% and XLF charges 0.08%.

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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