Market Overview

Not Your Standard Financial ETF And That's OK

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Not Your Standard Financial ETF And That's OK

It has been said throughout much of this year that the financial services sector, the second-largest sector weight in the S&P 500, has been a disappointment as the Federal Reserve has held off on raising interest rates.

Still, traditional, diversified financial services exchange traded funds are, in some cases, sporting year-to-date gains of over 5 percent. Proving that smart beta can really be a smart alternative at the sector level, some alternatively-indexed financial services ETFs are outperforming this year, a group that includes the First Trust Financials AlphaDEX Fd(ETF) (NYSE: FXO).

Foraging Through FXO

FXO is the financial services counterpart to the First Trust Materials AlphaDEX Fnd (ETF) (NYSE: FXZ), highlighted here earlier this week after making a series of all-time highs. Speaking of a string of all-time highs, FXO has own streak going on its way to a year-to-date gain of 6.8 percent. FXO was one of just seven ETFs to hit new highs Thursday.

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Like the other AlphaDEX ETFs, FXO focuses 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.

Industry-Level View

At the industry level, FXO looks a lot different than its cap-weighted rivals. For example, FXO's weight to money center banks is well below those found in traditional financial services ETFs. Likewise, the ETF has been at the right place at the right time this year with its 24.1 percent weight to insurance stocks and an almost 22 percent allocation to real estate investment trusts, the two best-performing industries within the broader financial services sector this year.

Insurance ETFs' rising rates advantage is tied to the strong dollar. The stronger greenback affects an array of sectors and industry groups, but not insurance companies because U.S.-based insurance providers write the bulk of their policies in the United States. In other words, it is impressive that FXO and dedicated insurance ETFs have been delivering for investors this year against the backdrop of essentially no help from the Fed.

The $734.9 million FXO holds 175 stocks, none of which commands a weight of over 1.2 percent. The median market value of those holdings is $8.2 billion, putting the ETF squarely in mid-cap territory, which has been a good place to be this year.

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