💼Cracking the Code of Financials with FXO

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Happy Tuesday, fellow investors and curious minds! At ETF UNO, we enjoy discovering ETFs that stand out from the crowd and create their own unique path. Today, we're exploring one such fund: the First Trust Financials AlphaDEX Fund $FXO ( ▲ 0.31% ) .

If you typically think of financial ETFs as uninteresting collections of large banks, it's time to reconsider. FXO is constructed differently, and its approach may come as a surprise.

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What is FXO?

Launched in May 2007, FXO is an ETF that provides investors with exposure to U.S. financial companies—but with a twist. Instead of following the typical “market-cap–weighted” model (where the biggest companies dominate the index), FXO uses First Trust’s AlphaDEX methodology.

This proprietary system screens and ranks stocks based on two types of factors:

• 🚀Growth factors (such as earnings growth and price momentum)

• 🔍Value factors (like price-to-book and cash flow ratios)

The result? A rules-based index that seeks to capture the strongest performers within the financial sector, not just the largest.

And when we say “financials,” FXO goes beyond just Wall Street banks. Its holdings include:

• Traditional banks

• Insurance companies

• Real estate investment trusts (REITs)

• Asset managers

• Speciality finance firms

The provider, First Trust Advisors, is a heavyweight in the ETF world with a reputation for building funds that put strategy and innovation front and centre.

Investment Strategy📊

Now that we understand what makes FXO different, let’s talk strategy. How might investors incorporate this ETF into a broader portfolio?

• 🧭Sector Tilt Strategy: FXO can be a focused financial sector allocation in your diversified ETF portfolio, offering more targeted exposure than a traditional cap-weighted financial ETF.

• ⚙️Factor Exposure: If you’re building a portfolio with smart-beta ETFs (funds that tilt toward factors like value, growth, or momentum), FXO fits right in. Its AlphaDEX model is essentially a built-in multi-factor strategy.

• ⚖️Diversifier: Adding FXO can help investors with broad-market ETFs overweight financials, particularly if the sector is expected to rebound.

• 🏢REIT Access: Because FXO includes REITs, it also provides indirect exposure to real estate. This adds a subtle layer of diversification compared to financial ETFs that exclude REITs.

FXO at a glance

ETF Issuer: First Trust

Inception: 2007-05-08

Asset Class: Equity

Underlying Index: StrataQuant Financials Index

Geographical Focus: U.S.

Expense Ratio: 0.61% (as of last data point)

Dividend Yield: 1.88% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

• Since Inception (2007), FXO has weathered storms—including the Global Financial Crisis, a decade of low interest rates, and the COVID-19 market shock. Over the long run, it has delivered performance broadly in line with, and at times better than, traditional financial sector funds.

• Five-Year Snapshot: Over the past five years, FXO’s returns have been competitive with an annualised return of 20.4%.

• Volatility: Because FXO tilts toward mid-cap and smaller financial firms, it can be more volatile than big-bank-heavy ETFs. That said, it has historically rewarded investors who can stomach the swings.

Performance aside, FXO’s true appeal lies in its unique construction, which can lead to differentiated results compared to plain-vanilla financial ETFs.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Smarter Stock Selection: The AlphaDEX methodology goes beyond size, rewarding companies with strong fundamentals and positive momentum. This approach helps avoid “dead weight” stocks that can negatively impact performance in market-cap-weighted indexes.

2. Diversification Beyond Banks: By including insurance companies, REITs, and asset managers, FXO provides broader exposure to financials than most ETFs. This diversification design can help stabilise performance if one segment, such as banks, is struggling.

3. Backed by First Trust’s Expertise: First Trust is one of the largest and most respected ETF providers in the U.S. Their experience in smart-beta and factor investing gives FXO credibility and staying power.

Top 3 Reasons Not to Invest

1. Higher Expense Ratio: FXO charges around 0.61% in annual fees, which is higher than plain-vanilla financial ETFs like XLF. Investors must believe the AlphaDEX strategy justifies the added cost.

2. More Volatility: By tilting toward smaller and mid-cap firms, FXO may experience sharper price swings. For risk-averse investors, this level of volatility may be uncomfortable.

3. Sector-Specific Risks: Financials are cyclical and sensitive to changes in interest rates, credit cycles, and regulatory environments. If the financial sector hits headwinds, FXO will almost certainly feel the impact.

📊FXO: The Financial ETF That Breaks the Mold

The First Trust Financials AlphaDEX Fund is a remarkable choice among financial ETFs! With its innovative factor-based strategy, it offers a unique perspective on the sector, aiming for enhanced performance and wider exposure beyond traditional banking stocks.

That said, higher fees, increased volatility, and sector-specific risks mean that FXO may not be suitable for everyone. It is a fund designed for investors seeking a more strategic financial approach and who are prepared to accept the associated risks.

At ETF UNO, we believe FXO deserves a spot on your radar if you’re looking for a sector ETF with personality.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.