As investors try to find opportunities in an extended bull rally, many should consider an alternative index-based exchange traded fund strategy that overweights companies with high revenue to potentially enhance returns ahead.
On the recent webcast (available on-demand), Why Revenue Weighting Now, Drew Thornton, Investment Strategist at OppenheimerFunds, argued that we are heading toward a slow growth and extended low-rate environment.
“Interest rates will remain low for the long term,” Thornton said. “Rates across much of the developed world have already adjusted for a new, slower-growth world, and low yields in Europe and Japan will help to keep a lid on U.S. rates.”
Looking at U.S. markets, some U.S. sectors exhibit stretched valuations. Specifically, Thornton warned that the utilities, materials, discretionary, technology and consumer staples sectors show some of the highest premium valuations, compared to their average valuations since 2000.
Given the heightened valuations and expectations for slower growth ahead, investors should look beyond traditional market-cap weighted indices and consider alternative strategies that may better target opportunities ahead.
“Smart beta breaks the link between market capitalization and weighting in portfolios,” Sharon French, Head of Beta Solutions at OppenheimerFunds, said. “While market cap weighted strategies provide broad access to the market, liquidity, and transparency at low cost, we feel market cap weighted portfolios aren’t ideal for two main reasons: It’s driven by price. Market cap vehicles overweight trendy sectors.”