A significant change was made yesterday to a prominent investment model portfolio, as the First Trust Financials AlphaDEX® Fund (FXO) was removed. The exclusion was triggered by the ETF falling below a key threshold within the model’s relative strength matrix. This move raises questions about whether broad, quantitative sector strategies are temporarily losing ground to more targeted industry bets.
Performance and Portfolio Composition
Despite its recent model exit, the ETF has posted a respectable start to the year. It delivered a 1.0% return in January, notably outperforming the sector average of 0.3%. The fund’s current portfolio holds approximately 104 positions. Its largest allocations are to First American Financial Corporation, with a 1.85% weighting, and Bank OZK, at 1.79%.
Additional recent performance contributors have included RenaissanceRe Holdings and Arch Capital Group. The strategy tracks the StrataQuant Financials Index, which selects and ranks Russell 1000 stocks using a combination of growth and value factors. This multi-factor methodology frequently results in an overweight to mid-cap institutions and insurance companies. However, it also leads to a high portfolio turnover rate, which was recently around 90%.
A Rotation Toward Banking Concentration
The ETF’s removal signals a clear shift in technical positioning. According to Nasdaq Dorsey Wright, the First Trust Nasdaq Bank ETF (FTXO) will take the vacant spot in the Focus Five model. This decision was based on FTXO demonstrating significantly stronger relative market strength lately.
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This switch highlights a broader rotation unfolding within the financial sector. Investors appear to be moving capital away from diversified, quantitative strategies and concentrating instead on specific industry subsets. Market observers have interpreted recent signals for the AlphaDEX ETF as weak, noting an elevated downside risk as its price tests crucial support levels.
Upcoming Rebalancing Pivotal
Attention now turns to the fund’s scheduled rebalancing in early March. This systematic process will adjust the ETF’s holdings based on updated fundamental rankings. It presents an opportunity to address recent momentum weaknesses through a reassessment of individual positions.
Concurrently, external factors will feed into this evaluation. The outcomes from the late-February meetings of the Basel Committee on Banking Supervision could influence the fundamental scores of banking stocks. Should these discussions lead to tighter international capital standards, the impact will be directly reflected in the portfolio’s new composition during the next rebalancing cycle.
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