The traditional way of weighting emerging markets equities in exchange traded funds and index funds is by market value, but over the years, some alternative weighting methodologies have proven more rewarding.
The Oppenheimer Emerging Markets Revenue ETF (NYSEARCA: REEM), which debuted in July, is a new way for investors to view emerging markets equities. REEM uses the revenue-weighting methodology Oppenheimer has had success with among U.S. equities, including dividend stocks and small-cap names.
The Oppenheimer Emerging Markets Revenue ETF looks to outperform the widely followed MSCI Emerging Markets Index. REEM charges 0.46% per year, or $46 on a $10,000 position. REEM allocates 23.6% of its weight to South Korea and almost 21% to China, the largest emerging economy. Taiwan and Russia combine for almost 20%, according to issuer data.
With that annual fee, REEM is among the least expensive smart beta emerging markets strategies.
REEM debuted on the same day as the Oppenheimer Global Revenue ETF (NYSEArca: RGLB), which seeks to outperform the MSCI All Country World Index with an expense ratio of 43 basis points, and Oppenheimer International Revenue ETF (NYSEArca: REFA), seeks to outperform the MSCI EAFE Index with an expense ratio of 42 basis points.
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.
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An ETF like REEM can help investors avoid overvalued emerging markets stocks as well as financially-challenged firms.
“By weighting companies by their revenue rather than their market capitalization, the fund aims to provide investors with increased exposure to the stocks of companies across the emerging markets with strong revenues. This approach also avoids the traditional index’s bias towards overvalued stocks, while maintaining a fully transparent investment process and offering the broad market diversification that has historically attracted investors to index strategies,” according to Oppenheimer.
Revenue-weighted domestic options include 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) and the Oppenheimer Financials Sector Revenue ETF (NYSEArca: RWW).
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.