What is FXR? (Pros, Cons, and Strategies)

If you're interested in diversifying your investment portfolio with a focus on industrial and producer durable sectors, FXR might be a valuable addition. The First Trust Industrials/Producer Durables AlphaDEX Fund (FXR) is a specialized ETF designed to track the performance of the StrataQuant® Industrials Index. This sector-specific ETF can provide exposure to some of the critical building blocks of the economy, from manufacturing to transportation and more.

In this post, we'll delve into what FXR is, its benefits and drawbacks, and various strategies to make the most of your investment.

What is FXR?

The First Trust Industrials/Producer Durables AlphaDEX Fund, or FXR, is an ETF that focuses on industrial and producer durable sectors in the U.S. stock market. Developed by First Trust, FXR utilizes the AlphaDEX method to create a portfolio based on sectors that produce or distribute durable goods or services.

FXR tracks the StrataQuant® Industrials Index, which uses a comprehensive selection and weighting methodology that attempts to outperform traditional market-cap weighted indices.

Key Features of FXR

• Sector Focus: Industries such as manufacturing, transportation, aerospace, and defense.
• Stock Selection: Based on growth and value factors like price appreciation, sales to price ratios, and one-year price performance.
• Dynamic Rebalancing: The index is rebalanced regularly to ensure the highest-scoring stocks are given greater weight.

This dynamic approach aims to capture the upside potential of industrial stocks with favorable growth and value metrics.

FXR Composition

FXR includes well-known companies across various sub-sectors within the industrial realm, such as Honeywell International (HON), Raytheon Technologies (RTX), Union Pacific (UNP), and Deere & Co. (DE). The ETF aims to include companies that are robust and leaders in their respective fields.

Pros of FXR

Sector Diversification

FXR offers exposure to the industrial sector, providing a balanced portfolio across multiple industries within this space. This diversification reduces sector-specific risks and offers balanced growth opportunities across various industrial markets.

Growth Potential

The selection methodology focuses on growth and value factors, aiming to capture stocks with solid price appreciation potential. This approach can lead to higher performance compared to traditional market-cap weighted indices.

Dynamic Rebalancing

Regular rebalancing helps keep the fund aligned with its investment goals. By continually adjusting the weights to favor stocks with high growth and value scores, FXR remains dynamic and responsive to market changes.

Cons of FXR

Sector-Specific Risks

Being heavily weighted in the industrial sector, FXR is exposed to risks unique to this sector, such as fluctuating commodity prices, regulatory changes, and economic cycles. This concentration can lead to higher volatility compared to more diversified ETFs.

Expense Ratio

FXR has an expense ratio of 0.64%, which is higher compared to some other ETFs. While the dynamic rebalancing and specialized focus might justify this cost, it still represents a higher annual fee for investors.

Performance Variability

Due to its focus on specific growth and value factors, FXR's performance can be more variable compared to broad market index funds. Investors seeking stable and consistent returns might find this variability less appealing.

FXR Investment Strategies

FXR can be a strategic part of an investment portfolio, especially for those looking to gain exposure to the industrial sector with a focus on growth. Below are some strategies to consider.

Long-term Growth Strategy

For long-term investors, FXR offers potential for significant growth due to its dynamic rebalancing methodology. By investing and holding for the long term, you can capitalize on the cyclical nature of the industrial sector and the growth potential of carefully selected companies.

Sector Rotation Strategy

FXR can be used as part of a sector rotation strategy, where investors move in and out of sectors based on economic cycles. During times of economic expansion, industrials often outperform, making FXR an attractive option during such periods.

Complementary Portfolio Strategy

Investing in FXR can complement a broader ETF portfolio, providing sector-specific exposure that balances out other investments. This approach allows for diversification across different sectors while leveraging the growth potential within the industrial sector.

Dividend Reinvestment Strategy

While not primarily a high-dividend ETF, FXR can still benefit from a dividend reinvestment strategy. Regularly reinvesting any received dividends can enhance the compounding effect, leading to more robust portfolio growth over time.

Conclusion

FXR offers a dynamic and growth-oriented way to invest in the industrial and producer durable sectors. With its specific focus, dynamic rebalancing, and solid growth potential, it's an appealing option for those looking to diversify into industrial stocks.

However, it's important to consider the higher expense ratio and sector-specific risks. By integrating FXR into a well-balanced investment strategy—whether through long-term growth, sector rotation, or as a complementary portfolio element—you can make the most of what this specialized ETF has to offer.