First Trust Financials AlphaDEX Fund (FXO) seeks to track the StrataQuant Financials Index, which uses a quantitative screening methodology to select and weight U.S. financial sector stocks based on growth and value factors rather than market capitalization.
How It Works
FXO employs First Trust's proprietary AlphaDEX methodology, which ranks financial stocks using growth factors (sales growth, one-year sales growth) and value factors (book value to price, cash flow to price). The top-ranked stocks receive higher weightings through a tiered equal-weighting system. The fund rebalances semi-annually in May and November, typically holding 75-100 financial companies including banks, insurance companies, and capital markets firms.
Key Features
- Uses quantitative factor-based weighting instead of market-cap weighting to potentially outperform traditional financial sector ETFs
- Semi-annual rebalancing captures momentum in growth and value factors while avoiding excessive turnover costs
- Concentrated exposure to 75-100 carefully selected financial stocks rather than broad sector representation
Risks
- This ETF can lose significant value during financial sector downturns, potentially declining 40-60% during banking crises or credit market stress
- Factor-based strategy may underperform market-cap weighted alternatives during periods when largest financial stocks outperform smaller ones
- Concentrated sector exposure means economic conditions affecting banks and insurers directly impact all holdings simultaneously
Who Should Own This
Best suited as a satellite holding (5-15% of equity allocation) for investors with 3+ year time horizons seeking tactical exposure to U.S. financials. High risk tolerance required due to sector concentration and factor volatility. Appropriate for investors who believe factor-based selection can outperform market-cap weighting in financial services.