A revenue-weighted ETF approach could serve as a compelling alternative to market-cap weighting for core equity positions.
On the recent webcast, Anchor Your Core with Revenue Weighting, Brian Levitt, Senior Investment Strategist for OppenheimerFunds, pointed out that the current market cycle is getting older, with valuations expanding and the yield curve flattening. For example, during the previous market highs during the period 1997 through 1999, the average price-to-sales of the S&P 500 Index was at 1.83, whereas the market was showing a 1.94 price-to-sales during the 2015 through 2017 period.
Levitt warned that equity valuations are near all-time highs and well above historical averages. The S&P 500 currently trades at a 2.16 price-to-sales ratio, compared to an average 1.45.
As the markets push higher, Levitt also highlighted the fact that the market is becoming concentrated in its largest names. Momentum was a driving factor over 2017 as investors piled into a handful of outperforming company stocks. Consequently, the top 15 components in the S&P 500 has contributed to almost 50% of overall gains last year.
Due to the heightened concentration risks associated with traditional market capitalization-weighted indexing methodologies, passive investors may be exposed to potentially greater risks if a sudden turn affects some of these high-flying stocks that now make up greater weights in passive index funds. Alternatively, David Mazza, Head of ETF Investment Strategy, Beta Solutions at OppenheimerFunds, argued that investors may consider revenue weighting the market to provide attractive value exposure with growth potential.
Revenue weighting provides “broad market coverage with the same number of stocks as the S&P 500 Index” and “greater exposure to attractively-valued companies with higher underlying growth rates relative to S&P Value Index,” Mazza said.
Mazza also showed that the revenue-weighting strategy may also hold up well in both growth- and value-oriented markets. During a value market environment, revenue weighting significantly outpaced the market and growth benchmarks while capturing the upside of value. Additionally, during heavy growth market conditions, while revenue weighting undermentioned pure growth, the weighting methodology still kept pace with the market and outperformed the value benchmark.
“Revenue weighting provides strong performance relative to blend, value, and growth benchmarks over the course of the full market cycle,” Mazza said.
For example, Levitt said the Oppenheimer Large Cap Revenue ETF (NYSEArca: RWL), Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK) and Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ) have each outperformed their category benchmark over the past 10 years and now rank in the top quartile of their respective 10-year peer group.
Other revenue-weighted ETF options include Oppenheimer Ultra Dividend Revenue ETF (NYSEArca: RDIV), Oppenheimer Financials Sector Revenue ETF (NYSEArca: RWW), Oppenheimer Global Revenue ETF (NYSEArca: RGLB), Oppenheimer International Revenue ETF (REFA), Oppenheimer Emerging Markets ETF (REEM), Oppenheimer ESG Revenue ETF (ESGL), and Oppenheimer Global ESG Revenue ETF (ESGF).
When building a diversified portfolio, Sharon French, Head of Beta Solutions for OppenheimerFunds, believed that revenue-weighted strategies may be a good fit for advisors and their clients to transition from traditional brokerage to a fee-based model as the indexing methodology can avoid unintended exposures through plain vanilla market-cap weighting. A revenue-weighting methodology may allow for further control of expected investment outcome.
Financial advisors who are interested in learning more about a revenue-weighted investment approach can watch the webcast here on demand.