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.
OppenheimerFunds offers a suite of revenue-weighted ETFs that specifically focus on companies with high revenues, including the Oppenheimer Large Cap Fund (NYSEArca: RWL), Oppenheimer Mid Cap Fund (NYSEArca: RWK), Oppenheimer Small Cap Fund (NYSEArca: RWJ), Oppenheimer Ultra Dividend Fund (NYSEArca: RDIV), Oppenheimer Global Growth Fund (NYSEArca: RGRO), Oppenheimer Financials Sector Fund (NYSEArca: RWW), Oppenheimer ADR Fund (NYSEArca: RTR), Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).
Specifically, the rules-based, disciplined smart beta indexing methodology targets known indices like the S&P 500 and tries to improve their performance return through weighting each security in the index by top line revenue. Components are then rebalanced every quarter to keep the Revenue-Weighted indices in line with the companies’ most recently reported revenue levels.
For instance, RWL reweights large-cap S&P 500 companies based on revenues, RWK reweights constituents from the S&P MidCap 400 Index, and RWJ reweights on S&P SmallCap 600 stocks. RDIV offers growth and income potential with access to the top large- and mid-cap (S&P 400 & 500) dividend paying stocks weighted by revenue.
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.
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.
Financial advisors who are interested in learning more about CFP/CIMA accredited panels on the online conference can register for the February 8, 2017 ETF Trends Virtual Summit.