A Suitable Core Smart Beta, Small-Cap ETF Play

Investors considering the smaller segment of the U.S. equities market may look to a revenue-focused exchange traded fund strategy. The value tilt may help this small-cap ETF outperform as the markets normalize.

The Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ) allows investors to gain exposure to the same securities as the S&P 600 Index but also ranks holdings by top line revenue, instead of market capitalization.

“Our transparent investment process re-weights the S&P 600 by each company’s revenue, producing a portfolio which we think is a better representation of companies’ economic contribution to the index,” according to an OppenheimerFunds note. “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.”

Traditional market-capitalization weighting methodologies would normally be more top heavy, overweighting companies that have outperformed. 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. The revenue-weighting methodology may also help investors focus on more undervalued companies with attractive fundamentals.