We believe Smart Beta strategies that weight portfolios by revenue are an optimal way to gain broad market exposure and pursue returns. In our view, this approach provides a number of compelling benefits. For instance, unlike other fundamental metrics, such as earnings, revenue cannot be easily manipulated by accounting practices without serious consequences for a company.
Read more: how to evaluate smart beta strategies.
A revenue-weighted strategy weights the same companies in an index, such as the S&P 500 Index, by their 12-month trailing revenue. Nearly every company has sales, so this approach creates a portfolio with full, diversified market exposure. It also provides exposure to the value factor since the resulting portfolio has a lower valuation profile, as measured by price-to-sale ratios, than a market-cap-weighted strategy.
Additionally, quarterly rebalancing pulls this strategy away from hot sectors, and avoids heavily weighting trendy, overvalued stocks. The historical evidence shows that a revenue-weighted strategy has the potential to outperform a market-cap-weighted strategy in the same index. This is in large part due to more pronounced tilts towards the factors of value, size and low volatility.
In this video, we summarize why we believe revenue weighting may hold great promise for investors.
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The alternate revenue-weighting approach employed by the Funds, while designed to enhance potential returns, may not produce the desired results. Because the Funds are rebalanced quarterly, portfolio turnover may exceed 100%. The greater the portfolio turnover, the greater the transaction costs, which could have an adverse effect on a Fund’s performance.
These views represent the opinions of the Portfolio Managers and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.