For decades, the general assumption has been that market-cap-weighted index vehicles provided investors with an optimal method of pursuing returns. But Smart Beta strategies, such as revenue weighting are challenging that idea.

We believe current S&P 500 Index valuations are forecasting muted future returns, and that market-cap weighted strategies are now overvalued relative to historical averages. The data also suggests the stage could be set for outperformance among revenue-weighted strategies. S&P 500 valuations are well above their 5-year average, but the last time price-to-sales ratios were near this level was before the tech bubble, a period when revenue-weighted strategies outperformed by 4.8% per year.

OppenheimerFunds’ suite of revenue-weighted strategies own the same stocks as an index – such as the S&P 500 – but weight companies by their revenue. Historical evidence suggests this approach can deliver better long-term returns, generating outperformance when stock valuations are high.

We believe quarterly rebalancing such strategies by revenue may offer investors three compelling benefits:

  1. Maintains focus on lower-valued companies.
  2. Reduces exposure to overpriced stocks.
  3. Could cause underperformance in a bubble, but holds the potential for better returns during the rebound and over the long term.

Explore more why revenue weighting may be a better way to access the entire market.