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.”
[related_stories]Alternatively, Oppenheimer argued that investors may be better off with a revenue-weighted indexing methodology. Revenue weighting could provide diversified exposure to the market, is not influenced by stock price, reflects a truer indication of a company’s value and offers stable sector exposure. Moreover, revenue weighting may provide a more value-oriented portfolio and historically outperformed in a value-driven market while showing lower drawdowns during growth-driven markets.
“Revenue weighting a portfolio results in a more value-oriented portfolio than the S&P 500 Index,” French said. “We believe this outperformance is simply due to revenue’s fundamental qualities – the top line isn’t easily manipulated by accountants and thus is the purest form of a company’s value.”
French also pointed out that by rebalancing toward companies with persistent sales, revenue weighting helps keep a portfolio from overstaying during an overheating market. The result could be a portfolio with better risk-adjusted returns over the long haul.
“With revenue weighting we want to challenge the notion that smart beta is a trading strategy,” Peter Novak, Head of Platform Analytics at OppenheimerFunds, said. “We feel that revenue weighting offers a long-term investment solution for clients’ portfolios. Through various economic regimes, revenue has the potential to outperform.”
Investors interested in ways to diversify away from traditional beta-index products can consider Oppenheimer’s suite of revenue ETF strategies, including broad options like Oppenheimer Large Cap Fund (NYSEArca: RWL), Oppenheimer Mid Cap Fund (NYSEArca: RWK) and Oppenheimer Small Cap Fund (NYSEArca: RWJ), and Oppenheimer Ultra Dividend Revenue ETF (NYSEArca: RDIV).
Financial advisors who are interested in learning more about a revenue-weighted investment strategy can watch the webcast here on demand.