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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.
Furthermore, the alternative indexing methodology may diminish some of the risks found in traditional beta index funds. 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.
For more information on alternative indexing strategies, visit our smart beta category.