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?

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.

Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.

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.

This area offers many different investment choices, such as simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies; however, not all of these strategies can deliver superior results.

Fund Sponsor & Index

The fund is managed by First Trust Advisors. FXO has been able to amass assets over $884.97 million, 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.

Annual operating expenses for this ETF are 0.62%, making it on par with most peer products in the space.

It's 12-month trailing dividend yield comes in at 2.42%.

Sector Exposure and Top Holdings

ETFs offer diversified exposure and thus minimize single stock risk, but it is still important to delve into a fund's holdings before investing. Most ETFs are very transparent products and many disclose their holdings on a daily basis.

This ETF has heaviest allocation in the Financials sector - about 98.20% of the portfolio.

Taking into account individual holdings, Arch Capital Group Ltd. (ACGL) accounts for about 1.87% of the fund's total assets, followed by Nu Holdings Ltd. (class A) (NU) and Apollo Global Management, Inc. (APO).

Its top 10 holdings account for approximately 17.57% of FXO's total assets under management.

Performance and Risk

So far this year, FXO has added about 14.33%, and was up about 28.10% in the last one year (as of 08/16/2024). During this past 52-week period, the fund has traded between $35.41 and $50.52.

The fund has a beta of 1.13 and standard deviation of 22.94% for the trailing three-year period, which makes FXO a medium risk choice in this particular space. With about 103 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) 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 $9.82 billion in assets, Financial Select Sector SPDR ETF has $42.31 billion. VFH has an expense ratio of 0.10% and XLF charges 0.09%.

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

Nu Holdings Ltd. (NU) : Free Stock Analysis Report

Apollo Global Management Inc. (APO) : Free Stock Analysis Report

Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report

Financial Select Sector SPDR ETF (XLF): ETF Research Reports

Vanguard Financials ETF (VFH): ETF Research Reports

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