However, with smart beta exchange traded fund strategies, investors can consider alternative ways to participate in the markets while reducing potential risks.
On the recent webcast (available on demand for CE Credit), Revenue Weighting—A Smarter Way to Own the Market, David Mazza, Head of Investment Strategy, Beta Solutions at OppenheimerFunds, argued that rising demand for smart beta has been driven by specific investor needs that traditional beta index funds do not provide. For instance, smart beta strategies aspire to beat benchmark indices, diminish portfolio risk through targeted exposures, maintain diversified portfolios through various market cycles and provide diverse ways to access the market in a cheap ETF wrapper.
The things smart beta ETFs promise to achieve are also among the top attributes many are looking for in an investment. According to a recent FTSE Russell survey on asset owners, investors use smart beta largely for its risk reduction, return enhancement, improved diversification, cost savings and specific factor exposures.
Given the growing universe of ETF options, investors are spoiled for choice as there are now a number of various smart beta strategies available from single factor offerings to multi-factor funds that combine various market proven factors.
Frank Vallario, Portfolio Manager, Beta Solutions for OppenheimerFunds, focused on fundamental factors that can help support an investment over the long-term, including revenue weighting. Specifically, revenue has the last ability to be manipulated, providing investors with a clear factor that could help produce improved risk-adjusted returns.
“Revenue weighting provides the same complete, diversified coverage of the equity market that cap-weighting does, but it emphasizes an important company fundamental – revenue – rather tan companies’ stock prices,” Mazza said.
Because of the revenue-weighting characteristic, a fund strategy tilts away from potentially overvalued momentum stocks and leans more toward low valuation companies with low price-to-book. The revenue-weight factor could also provide a better or more diversified way for investors to participate in the markets over the long haul.
“Historical evidence suggests that a revenue-weighted portfolio can maintain stable country and sector exposures during market price swings, since strategies are grounded by a company fundamental, rather than by stock prices, and are rebalanced quarterly,” Mazza said.
Investors who believe in a return to fundamentals can look to the revenue-weighted methodology, including options like the Oppenheimer Large Cap Revenue ETF (NYSEArca: RWL), Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK) and Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ).
Vallario explained that each portfolio begins with the same basket of securities as a benchmark index, like those from the Standard & Poor’s or MSCI. However, each security is weighted by its trailing four quarters of revenue, instead of by its market capitalization, with a 5% maximum portfolio weight for any single issuer. The portfolio is then rebalanced on a quarterly basis.
Financial advisors who are interested in learning more about a revenue-weighted investment approach can watch the webcast here on demand.