Financial services stocks and ETFs have recently been in rally mode, but that ebullience is not restricted to the traditional funds tracking the sector. The Oppenheimer Financials Sector Revenue ETF (NYSEArca: RWW) is up about 5% over the past month.
“Oppenheimer Financials Sector Revenue ETF gives investors targeted access to the same stocks as the S&P 500 Financials Index, which consists of those S&P 500 companies classified in the Financials sector using the Global Industry Classification Standard (GICS) system,” according to Oppenheimer. “We weight each security in the index by revenue instead of by market capitalization, producing what we think is a better representation of the economic reality of the Financials investment universe.”
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. 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.
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.
Looking ahead, a number of factors could continue to support the financial sector. For instance, the Federal Reserve has expressed intention to raise rates, tighten monetary policy. Banks’ most basic profit-making business model is to take on deposits and issue loans, so higher interest rates means higher rates on loans, which translates to improved profit margins.
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While RWW has recently been setting a torrid pace, the potential exists for the ETF to deliver out-performance of traditional rivals.
“The data also suggests the stage could be set for outperformance among revenue-weighted strategies. S&P 500 valuations are well above their 5-year average, but the last time price-to-sales ratios were near this level was before the tech bubble, a period when revenue-weighted strategies outperformed by 4.8% per year,” notes Oppenheimer.
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. After failing on the healthcare front, Congressional Republicans are likely to push forward with tax reform, looking to make that the centerpiece of their 2017 legislative accomplishments.
OppenheimerFunds’ suite of revenue-weighted ETFs also includes the Oppenheimer Large Cap Revenue ETF (NYSEArca: RWL), Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK), Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ), Oppenheimer Ultra Dividend Revenue ETF (NYSEArca: RDIV), Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).
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