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

The First Trust Financials AlphaDEX ETF (FXO), a $2.12 billion smart beta fund launched in 2007, aims to generate alpha within the Financials sector by tracking the StrataQuant Financials Index through an AlphaDEX screening methodology. With an expense ratio of 0.61%, FXO has returned 20.55% over the past 12 months and carries a medium-risk profile (beta 1.01). Positioned for investors seeking to outperform traditional market-cap weighted financial ETFs, FXO offers diversification across 103 holdings, contrasting with lower-cost alternatives like VFH and XLF.

Analysis

The First Trust Financials AlphaDEX ETF (FXO) is a smart beta fund offering targeted exposure to the financials sector with the objective of generating alpha over traditional market-cap weighted indexes. It operates with a substantial $2.12 billion in assets under management, tracking the StrataQuant Financials Index which uses the AlphaDEX screening methodology to select stocks from the Russell 1000. Its performance has been notable, with a 20.55% return over the last 12 months, although the year-to-date return is more modest at 2.24%. The fund's risk profile is characterized as medium, with a market-like beta of 1.01 and a three-year standard deviation of 22.81%. A key consideration is its expense ratio of 0.61%, which is significantly higher than passive alternatives like VFH (0.09%) and XLF (0.08%). The portfolio is well-diversified across 103 holdings, mitigating single-stock risk, with the top 10 holdings constituting only 17.46% of total assets.

Key Decisions for Investors

• Investors seeking to outperform the standard financials sector benchmarks, and who are willing to pay a higher management fee for a rules-based active strategy, could consider FXO given its strong 12-month trailing performance.
• Cost-sensitive investors or those preferring passive market exposure should evaluate lower-cost alternatives like VFH or XLF, which offer exposure to the financials sector for a fraction of the expense ratio.
• Potential investors should assess if FXO's medium-risk profile, with a beta of 1.01, aligns with their portfolio's risk tolerance, and they should continually weigh its performance against its higher fees relative to passive peers.