As investors consider alternative ways to access various markets to potentially enhance returns or better manage risks, consider a smart beta exchange traded fund option for traditional exposure to the S&P MidCap 400.
Specifically, the Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK) selections components from the broad basket of S&P MidCap 400 stocks but reweights holdings based on each company’s revenue, producing a portfolio that could potentially provide a better representation of companies’ economic contribution to the benchmark index.
“By ranking through revenue instead of market capitalization, we remove the traditional index’s bias towards overvalued stocks while maintaining the transparency and broad diversification that has historically attracted investors to index strategies,” according to OppenheimerFunds.
Due to the revenue-weight tilt, investors won’t be exposed to trendy, overpriced stocks that market cap-weighted indices are prone to be, and investors will hold companies with more attractive valuation characteristics with a slight value tilt. By rebalancing the portfolio every quarter towards companies that have had persistent sales, revenue weighting keeps the portfolio from getting ahead of itself in overheating market conditions.
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.
Additionally, 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. Revenue doesn’t sway with market sentiment and cannot be manipulated.
When comparing RWK to the benchmark S&P MidCap 400, the revenue-weighted ETF takes a greater tilt toward small-capitalization stocks and leans toward the value category, whereas the benchmark index focuses more on middle-capitalization stocks and a larger position in growth-oriented companies.
RWK is also overweight consumer cyclical, financials and industrials while underweight real estate when compared to the benchmark index.
For more information on alternative index-based strategies, visit our smart beta category.