Market capitalization-weighted funds are known to lean toward the largest company stocks on the market, but Exponential ETFs is flipping the traditional role with a reverse cap-weighted ETF strategy.
On Tuesday, Exponential ETFs launched the Reverse Cap Weighted U.S. Large Cap ETF (CBOE: RVRS), which has a 0.29% expense ratio.
“Portfolios that allocate weightings by market capitalization skew to the largest stocks. This leaves large sections of the market under-represented or not represented at all,” according to Exponential ETFs. “Reverse Cap weighting attempts to fill this gap.”
The Reverse Cap Weighted U.S. Large Cap ETF will try to reflect the performance of the Reverse Cap Weighted U.S. Large Cap Index, which is comprised of S&P 500 constituent but weights components with a greater emphasis on the smaller-end of the large-cap market, according a prospectus sheet.
Unlike traditional market-cap weighted indices that places a greater emphasis on the largest companies in the space, this methodology will give a greater tilt toward the smaller companies. The strategy will bring the weighted average market capitalization of the index down from $162 billion to $16 billion.
“Market capitalization weighting exposes investors to a concentrated portfolio and an extreme bias toward mega-capitalization companies, which can result in returns being left on the table,” Exponential ETFs CEO Phil Bak said in a note. “With RVRS, we’re solving this problem and providing a tool for investors to balance out their exposure within their large cap U.S. allocation.”