FXO First Trust Financial AlphaDEX Fund

2013 is off to a pretty good start for investors. This strength across the market continues the upward trend that investors saw—for the most part—in the last 45 days of 2012 as well, suggesting that a risk-on environment is permeating the marketplace.

Yet while the S&P 500 was strong and broad market ETFs rose higher, there were a few segments that have really been the true leaders to start the New Year. Below, we highlight three ETFs which have seen solid gains in recent trading—far in excess of the S&P 500-- and could be worth a closer look by investors seeking strong momentum plays as we push further into 2013.

Cashing in on Financials’ Strength

Financials have long been a loser, but are now finally starting to turn things around as several members of the group have already posted strong results in just the first part of earnings season. Huge institutions like Wells Fargo (WFC) and Goldman Sachs (GS) have both posted better-than-expected results, and for very different reasons no less.

In fact, Wells Fargo led the more ‘traditional’ banking sector higher on a strong lending portfolio, while Goldman surged ahead on solid investment banking revenues. This could suggest that both sides of the financials segment are seeing continued bullish trends, a scenario which could persist as the economy slowly improves (read Financial ETFs Set to Rally in Earnings Season).

A broad way to play this trend is via the First Trust Financials AlphaDEX Fund (FXO). This product looks to zero in on the top financial firms by applying their AlphaDEX methodology which ranks stocks by various growth and value metrics, while stripping out the bottom ranked 25% in the industry.

This results in a fund that has about 165 stocks in its basket and pretty much no company specific risk; not a single firm has more than 1.25% of the total assets. The exposure isn’t cheap though as it costs 70 basis points a year in fees, though the volume is rather high, helping to keep bid ask spreads tight.

Currently, FXO has a Zacks ETF Rank of 1 or ‘Strong Buy’ and has surged by about 5.3% in the past month.

Airlines Taking Off

For much of 2012, the broad transportation space was extremely weak, as concerns were building over the global economic outlook. This was especially true in the airline segment as many were worried about a stronger price of crude and a weakened consumer leading to lower demand for the space.

This has turned around as of late though, as oil prices have moderated and fears over a fiscal cliff and debt ceiling fight have been eliminated. Since global air travel remains high and a slowdown doesn’t seem imminent, many have bought up airlines as a nice cyclical play in this type of market environment (see New Leadership in the Tech ETF Space?).

One easy way to do this in fund form is with the Guggenheim Airline ETF (FAA). This ETF charges investors 65 basis points a year in fees, holding about 30 securities in total in the basket.

The fund has a relatively low PE of about 11.4 and a heavy focus on American stocks which make up about 70% of total assets. Among the top holdings are Delta (DAL), United-Continental (UAL), and Southwest Airlines (LUV), all of which make up at least 15% of assets.

The fund has added more than 5% in the past month and has surged by over 21% in the trailing three month period.

The wild ride in Japan ETFs

Internationally, things remain somewhat shaky in the developed world. Europe remains relatively weak—and unfavorable from a Zacks ETF Rank perspective—while the few remaining nations (like Canada, Australia, and New Zealand) are heavily dependent on commodities, save for one, Japan.

Japan could potentially be back on track though, as its new Prime Minister, Shinzo Abe, has vowed to resurrect the economy at all costs by boosting inflation (to 2%) and getting the country finally out of the doldrums. It will certainly be a tough task but his push for a weaker yen could boost exporters’ prospects and increase the Nikkei this year (see For Japan ETFs, Think Small Caps).

Investors should note though, that this type of lower yen environment looks likely to reduce gains when you consider Japanese performance in dollar form, a situation that makes a fund like the WisdomTree Japan Hedged Equity Fund (DXJ) a great play. This ETF targets Japanese companies but also utilizes a currency hedge in order to strip out yen exposure.

This will allow investors to purchase Japanese stocks without worrying about what the yen is doing, something that could be very beneficial if Shinzo Abe’s plans end up working over the course of 2013. So, while investors avoid the worst of a weak yen’s effects, they can also benefit from DXJ’s focus on exporters, which look to be the true winners from a low currency policy by the Japanese government.

This has already started to happen as DXJ has risen by 4.8% in the trailing one month period, and nearly 24% in the past three months. Still, some of the gains have been dulled by rising tensions with China, which is part of the reason that we just assign the fund a Zacks ETF Rank of 3 or ‘hold’ for the time being.

Bottom Line

While there is no telling if these performances will continue, all three do have interesting trends at their back, suggesting that we could see a continuation once we push past earnings season. If this is the case, some new leaders are definitely taking hold of the market, meaning that we may want to consider cycling into different names this year in order to take advantage of this new stock environment.

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DELTA AIR LINES (DAL): Free Stock Analysis Report
 
WISDMTR-J HEF (DXJ): ETF Research Reports
 
GUGG-AIRLINE (FAA): ETF Research Reports
 
FT-FINL ALPHA (FXO): ETF Research Reports
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
SOUTHWEST AIR (LUV): Free Stock Analysis Report
 
UNITED CONT HLD (UAL): Free Stock Analysis Report
 
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
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