Exchange traded funds tracking the financial services sector, the second-largest sector weight in the S&P 500, have a few things in common beyond on the obvious.
Among those similarities are the facts that financial services stocks and ETFs have recently been in rally mode, but even with that upside, some of the group’s marquee ETFs still remain well below their pre-financial crisis highs. Indeed, it is impressive that some financial services ETFs have recently touched mutli-year highs, but investors looking for a fund tracking this sector that has made a new all-time high can turn to the First Trust Financial AlphaDEX Fund (NYSEArca: FXO). [Big Bank ETF Rallies]
FXO entered Monday with a year-to-date gain of 4.2%. Up 0.6% at this writing, the $877.4 million ETF touched a new all-time high earlier Monday, underscoring the advantages of First Trust’s AlphaDEX methodology in bull markets.
Arguably, FXO’s ascent to a fresh all-time high is even more impressive when evaluating the ETF’s industry weights. While traditional financial services ETFs have recently been buoyed by resurgent money center banks, FXO’s largest industry allocation is 35.8% to insurance providers. That is more than double the 16.3% the ETF devotes to banks.
What FXO’s sturdiness impressive is that insurance companies have been stung this year by fewer Americans taking out life insurance policies and low interest rates hindering net interest margins. [Insurance ETFs Look to Rebound]
Like the other AlphaDEX ETFs, FXO’s 172 holdings are selected based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Said differently, FXO qualifies as a smart beta ETF. While the terminology, and some of the AlphaDEX ETFs’ performances for that matter, have been derided, there is no escaping that FXO has been less bad than traditional financial services ETFs during times of market tumult.
FXO debuted in May 2007, so investors can look back and evaluate the ETF’s performance during the global financial crisis. FXO slumped 62.2% from the start of 2008 through March 9, 2009 market bottom. Of course, that is nothing to brag about, but that performance was 1,000 basis points better than that of the cap-weighted Vanguard Financials ETF (NYSEArca: VFH). To boot, FXO was significantly less volatile than VFH during the crisis.
Over the three years ending July 31, FXO’s standard deviation was about 240 basis points lower than the S&P Financials Index while sporting a lower beta and higher Sharpe Ratio, according to issuer data. During that time, FXO has outpaced VFH by 410 basis points while being slightly less volatile as well.
First Trust Financial AlphaDEX Fund
