A Smart ETF Strategy to Find Value in U.S. Stocks

“Simply put, investors are expressing a clear preference for large-cap stocks over small- and mid-cap equities,” Leger said.

U.S. large-caps may continue to enjoy greater tailwinds behind future growth when compared to small-caps.

“We see 11 forces supporting the continued outperformance of U.S. large-cap stocks: 1) investor regime switching away from U.S. small-cap stocks; 2) easy credit conditions in the form of loose bank lending standards; 3) heightened volatility; 4) lower corporate tax rates; 5) a flattening Treasury yield curve; 6) below-average U.S. economic growth; 7) higher exposure to faster international growth; 8) U.S. dollar weakness; 9) better earnings growth; 10) strong investor inflows; and 11) positive price momentum,” Leger added.

As a way to gain exposure to U.S. large-cap stocks with a focus on those with strong financials to help improve investment outcomes, Mo Haghbin, Head of Product, Beta Solutions at OppenheimerFunds, pointed to the smart-beta, revenue-weighted indexing methodology, which acts as the underlying strategy for the Oppenheimer Large Cap Revenue ETF (NYSEArca: RWL). This alternative index-based strategy would reweight portfolios based on different factors results in different weightings across sectors, industries, and individual stocks.

“Revenue offers a unique way to weight a portfolio because it is a metric that cannot be easily manipulated by accounting practices, like earnings, and it is not based on a management decision, as dividends are. Furthermore, when incorporated into a portfolio, revenue weighting provides investors a combination of benefits,” Haghbin said.

For example, revenue weighting can provide broad coverage of the market since revenue provides the same complete, diversified coverage of the equity market that market-cap weighting does. However, the exposures in a revenue-based portfolio will not be based on companies’ unpredictable stock prices.

Revenue is also seen as a pure indicator of value where a portfolio tilts away from potentially overvalued momentum stocks and toward low valuation companies, which historically have been able to generate excess returns over time.

Additionally, Ryan O’Carroll, ETF Specialist for OppenheimerFunds argued that the revenue focus may exhibit greater stable exposure in many different markets. Historical evidence suggests that revenue-weighted portfolios maintain more stable sector and country exposures than market-cap weighting because the portfolios are grounded in fundamentals, not stock prices, and they are rebalanced quarterly by companies’ latest revenue results.

Financial advisors who are interested in learning more about how to find value in U.S. large cap equities can watch the webcast here on demand.