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.
“We think it is incredibly important to look beyond market capitalization and focus on fundamental metrics such as revenue when building an efficient portfolio,” according to an OppenheimerFunds research note. “Our revenue-weighting methodology can help investors look through the noise of short-term price movements and focus on the long-term fundamentals that matter. Because of this we continue to believe that RWL will provide an opportunity to outperform the capitalization-weighted S&P 500 over the long term.”
Traditional cap-weighted indices, like the S&P 500, are overweight the largest or best performing companies, which leaves less upside potential as the indices are more top heavy on established firms with less room to run. On the other hand, an alternative indexing style, such as a revenue-weighted index methodology, could allow investors to focus on companies continuing to grow.
Moreover, by highlighting fundamental factors like revenue, investors are better able to weather any short-term storms, especially with the market focusing on many of our new president’s pro-growth promises that have yet to come to fruition, other political risks and the Federal Reserve’s recently anticipated increases in rates, which may all further add to short-term risks.