Investors looking to invest in a revenue-weighted ETF can consider the Oppenheimer Large Cap Revenue ETF (NYSEARCA: RWL) that weights S&P 500 firms by revenue.
There are scores of ways that ETFs weigh U.S. stocks. There is the prosaic, traditional cap-weighted methodology. Some equal-weight funds are also popular with investors, but revenue-weighted strategies also merit consideration.
When it comes to RWL, for example, components are rebalanced every quarter to keep the Revenue-Weighted indices in line with the companies’ most recently reported revenue levels. Long-term data suggest RWL’s strategy works for investors as the ETF has returned nearly 120% since coming to market in early 2008.
Traditional market capitalization-weighted indices are top heavy and expose investors to some of the most high-flying stocks of the current market. If investors are concerned about the potential risks of an overextended market, consider a revenue-weighted exchange traded fund strategy to focus on companies with better fundamentals.
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.
Weighting by sales gives RWL a different look than traditional S&P 500-tracking funds. For example, Apple Inc. (NASDAQ: AAPL), the largest U.S. company by market value, is RWL’s third-largest holding. Several of RWL’s top 10 holdings are not top 10 holdings in standard S&P 500 funds. Wal-Mart Stores Inc. (NYSE: WMT) and Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) are RWL’s top two holdings, combining for 6.7% of the ETF’s lineup.
RWL also provides investors with different sector views on the S&P 500. Whereas technology, financial services and healthcare are the top three sector weights in the S&P 500, consumer discretionary, healthcare and consumer staples are RWL’s top three sector weights, according to Oppenheimer data.
As the bull market extends, investors tend to forget about valuations and continue to ride high-flying stocks, which may potentially expose investors to risks, such as a quick drawdown. Additionally, in an extended bull run, traditional market capitalization-weighted indices become top heavy and expose investors to some of the most high-flying stocks of the current market.
Over the past three years, RWL has posted a compound annual growth rate (CAGR) of 8.1%. The ETF’s standard deviation is inline with that of the cap-weighted S&P 500.
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Tom Lydon’s clients own shares of Apple.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.