Remembering Revenue Weighting

By Todd Shriber via

With more and more advisers and institutional investors embracing smart beta strategies, the universe of fundamentally-weighted exchange traded funds (ETFs) is rapidly growing.

One potential pitfall of smart beta’s exponential growth is the dizzying variety of strategies coming to market, making it potentially cumbersome for advisers to stay abreast of all the newest concepts while also remaining focused on some alternatively-weighted methodologies that have already proven durable.

Revenue weighting is an example of an alternative to traditional market capitalization weighting that not only has a long-term track record, but is easy to comprehend and deploy within client portfolios. For example, the S&P 500 Revenue-Weighted Index was launched at the end of 20051, meaning it is battle-tested as it was around during the dark days of the global financial crisis.

Again, revenue-weighted indexes and funds are straight forward. The S&P 500 Revenue-Weighted Index is comprised of the S&P 500 member firms weighted by top-line revenue, not market value, which is the weighting methodology for the standard S&P 500 and related funds. As the chart below confirms, revenue weighting has a solid long-term track record.

Advantages of Revenue Weighting

Using the S&P 500 Revenue-Weighted Index as our “bogey” here, there are some notable advantages with weighting stocks by top-line revenue. One example is reduced concentration risk. Currently, the top 10 holdings in the S&P 500 Revenue-Weighted Index combine for about 17.60% of the benchmark’s weight. In the cap-weighted S&P 500, that number jumps to 21.76% (as of July 23).

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