Market capitalization-weighted methodologies have been the dominate investment strategy for decades, but it comes with its own risks. To help better diversify, smart beta strategies like revenue-weighted exchange traded funds could be a way for investors to enhance returns and diminish market risks.
“When you invest in funds weighted by market cap, you’re just buying an index with no methodology for how the underlying stocks are screened,” Sharon French, Executive Vice President and Head of Beta Solutions at OppenheimerFunds, said in a note. “When you buy the S&P 500, for example, you’re also buying all the emotion and panic in what the marketplace reflects.”
Alternatively, through customized index-based ETF strategies, investors can gain greater exposure to market factors that could potentially lead to enhanced risk-adjusted returns.
“We’ve found that using revenue and measuring a company’s top-line performance can be a great way to weight an index that has high predictability of future outperformance,” French said. “Revenue doesn’t panic and cannot be manipulated. That’s why we believe revenue-weighted ETFs hold great promise for investors.”
On February 8, financial advisors and ETF industry insiders can easily enjoy the exchange of ideas and more information on smart-beta strategies in a conference setting through a virtual environment through the annual online ETF Trends Virtual Summit, sponsored by OppenheimerFunds.