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.
Related: Factors ETF Investors Should Look For
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.