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?

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.

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

But, there are some investors who would rather invest in smart beta funds; these funds track non-cap weighted strategies, and are a strong option for those who prefer choosing great stocks in order to beat the market.

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.

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

FXO is managed by First Trust Advisors, and this fund has amassed over $955.50 million, which makes it one of the average sized ETFs in the Financials ETFs. FXO seeks to match the performance of the StrataQuant Financials Index before fees and expenses.

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.

Operating expenses on an annual basis are 0.62% for FXO, making it on par with most peer products in the space.

It's 12-month trailing dividend yield comes in at 2.04%.

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.

For FXO, it has heaviest allocation in the Financials sector --about 98.40% of the portfolio.

When you look at individual holdings, Jefferies Financial Group Inc. (JEF) accounts for about 1.89% of the fund's total assets, followed by Kkr & Co. Inc. (class A) (KKR) and The Progressive Corporation (PGR).

Its top 10 holdings account for approximately 17.86% of FXO's total assets under management.

Performance and Risk

So far this year, FXO has gained about 25.63%, and is up roughly 45.15% in the last one year (as of 10/17/2024). During this past 52-week period, the fund has traded between $35.41 and $53.67.

The fund has a beta of 1.13 and standard deviation of 22.89% 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 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 $10.68 billion in assets, Financial Select Sector SPDR ETF has $44.84 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

Jefferies Financial Group Inc. (JEF) : Free Stock Analysis Report

The Progressive Corporation (PGR) : Free Stock Analysis Report

KKR & Co. Inc. (KKR) : Free Stock Analysis Report

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

Vanguard Financials ETF (VFH): ETF Research Reports

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