A smart beta exchange traded fund, the First Trust Financials AlphaDEX ETF (FXO) debuted on 05/08/2007, and offers broad exposure to the Financials ETFs category of the market.
What Are Smart Beta ETFs?
The ETF industry has long been dominated by products based on market cap weighted indexes, a strategy created to reflect the market or a particular market segment.
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.
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.
These indexes attempt to select stocks that have better chances of risk-return performance, based on certain fundamental characteristics or a combination 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
The fund is managed by First Trust Advisors. FXO has been able to amass assets over $1.91 billion, making it one of the larger ETFs in the Financials ETFs. This particular fund 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
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.
Operating expenses on an annual basis are 0.61% for FXO, making it on par with most peer products in the space.
FXO's 12-month trailing dividend yield is 2.35%.
Sector Exposure and Top Holdings
Most ETFs are very transparent products, and disclose their holdings on a daily basis. ETFs also offer diversified exposure, which minimizes single stock risk, though it's still important for investors to research a fund's holdings.
For FXO, it has heaviest allocation in the Financials sector --about 99.60% of the portfolio.
Looking at individual holdings, Berkshire Hathaway Inc. (class B) (BRK/B) accounts for about 1.99% of total assets, followed by Markel Group Inc (MKL) and Lpl Financial Holdings Inc. (LPLA).
Its top 10 holdings account for approximately 17.58% of FXO's total assets under management.
Performance and Risk
Year-to-date, the First Trust Financials AlphaDEX ETF has lost about -8.49% so far, and was up about 10.88% over the last 12 months (as of 04/23/2025). FXO has traded between $44.83 and $59 in this past 52-week period.
The ETF has a beta of 1 and standard deviation of 23.85% 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 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) 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 $11.35 billion in assets, Financial Select Sector SPDR ETF has $48.27 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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First Trust Financials AlphaDEX ETF (FXO): ETF Research Reports Markel Group Inc. (MKL): Free Stock Analysis Report LPL Financial Holdings Inc. (LPLA): Free Stock Analysis Report Financial Select Sector SPDR ETF (XLF): ETF Research Reports Vanguard Financials ETF (VFH): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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