Smart Beta Funds: RevenueShares Large Cap ETF (RWL)
Like the previously mentioned RSP, the RevenueShares Large Cap (RWL) smart beta ETF takes the classic S&P 500 and reweights the constituents to create its portfolio. This time RWL uses a company’s revenues as its guide.
The basic idea is that focusing on a firm’s revenues is key to finding value. There is some research that suggests that revenue, unlike other fundamental factors, is unique in the sense that you can’t manipulate it and can be applied equally to all members of an index. Metrics like price-to-earnings ratios and market caps can change as investors buy or sell a stock.
By doing this, RWL hopes to lower exposure to overvalued companies, while increasing exposure to undervalued ones before revenues are fully reflected in share prices.
It’s an interesting concept, and the $200 million smart beta fund has done pretty well. RWL has managed to outperform the S&P 500 over the last five years with annual average returns of 23.4%.
The only downside is that trading volume for RWL is weak and the expenses are a bit high compared to the pack, at 0.75%.
As of this writing, Aaron Levitt was long RSP.