With the Federal Reserve widely expected to raise interest rates at its December meeting, some investors may consider betting on the rate-sensitive financial services sector. They do not need to confine their bets to traditional, cap-weighted exchange traded funds. The Oppenheimer Financials Sector Revenue ETF (NYSEArca: RWW) is an ETF to consider as rates move higher.
RWW is not the usual financial services ETF, which weigh stocks by market value. The Oppenheimer ETF provides exposure to the stocks in the S&P 500 Financials Index on a revenue-weighted basis. RWW is up about 7% in the fourth quarter.
Although the Fed has raised interest rates twice this year with another rate hike likely coming before the end of 2017, there are concerns about the central bank’s dovish tone and its impact on ETFs such as RWW. It is expected the Fed will boost borrowing costs one more time before the end of this year and that as many as three rate hikes could be on tap for 2018.
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.
Because of the revenue-weighting characteristic, a fund strategy tilts away from potentially overvalued momentum stocks and leans more toward low valuation companies with low price-to-book. The revenue-weight factor could also provide a better or more diversified way for investors to participate in the markets over the long haul.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration.
Deregulation could also help the financial sector improve their margins. President Donald Trump’s administration has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry.
RWW features exposure to plenty of traditional and investment banks, but the ETF’s largest holding is a 15.5% allocation to Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B). That position broadens RWW’s scope across the financial services sector, the second-largest sector weight in the S&P 500.
RWW holds 68 stocks.
For more on smart beta ETFs, visit our Smart Beta Channel.