Launched on 05/08/2007, the First Trust Financials AlphaDEX ETF (FXO) is a smart beta exchange traded fund offering broad exposure to the Financials ETFs category of the market.

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.

Market cap weighted indexes work great for investors who believe in market efficiency. They provide a low-cost, convenient and transparent way of replicating market returns.

On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.

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.

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

Managed by First Trust Advisors, FXO has amassed assets over $841.80 million, making 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

Expense ratios are an important factor in the return of an ETF and in the long-term, cheaper funds can significantly outperform their more expensive cousins, other things remaining the same.

Annual operating expenses for FXO are 0.62%, which makes it on par with most peer products in the space.

It's 12-month trailing dividend yield comes in at 2.71%.

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.

Representing 97.80% of the portfolio, the fund has heaviest allocation to the Financials sector.

Taking into account individual holdings, The Progressive Corporation (PGR) accounts for about 2.06% of the fund's total assets, followed by Assured Guaranty Ltd. (AGO) and Renaissancere Holdings Ltd. (RNR).

FXO's top 10 holdings account for about 18.67% of its total assets under management.

Performance and Risk

Year-to-date, the First Trust Financials AlphaDEX ETF return is roughly 6.05% so far, and it's up approximately 24.02% over the last 12 months (as of 06/13/2024). FXO has traded between $35.41 and $47.69 in this past 52-week period.

The ETF has a beta of 1.13 and standard deviation of 23.18% for the trailing three-year period, making it a medium risk choice in the 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 $9.09 billion in assets, Financial Select Sector SPDR ETF has $38.39 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

RenaissanceRe Holdings Ltd. (RNR) : Free Stock Analysis Report

The Progressive Corporation (PGR) : Free Stock Analysis Report

Assured Guaranty Ltd. (AGO) : Free Stock Analysis Report

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

Vanguard Financials ETF (VFH): ETF Research Reports

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