Investing In The Top Line

December 29, 2008

Is gross sales a better gauge by which to set index weights? A trio of ETFs offers an interesting comparison to traditional S&P benchmarks.


The universe of fundamentally weighted exchange-traded funds was expanded this year by new issues from RevenueShares. Those, of course, featured a set of ETFs weighting all the stocks within the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indexes according to their annual revenues.

In November of this year, two other ETFs were issued. Those were the RevenueShares ADR Fund and the RevenueShares Financials Sector Fund. Again, revenue is the only item used in the RevenueShares weighting methodology.

A Different Sort Of Process

Among alternatively weighted ETFs, RevenueShares employs a unique method. Its ETFs do not follow a fundamentally weighted index, but instead reallocate previously existing indexes by Standard & Poor's utilizing all of the stocks within the index.

For example, the RevenueShares Large Cap Fund creates the ETF by taking the revenue from each company within the S&P 500 and dividing by the total revenue of the S&P 500 to get each stock's weight within the ETF.

This is different from other fundamentally weighted ETFs that use a fundamental methodology to screen for stocks in a systematic way, creating an index weighted heaviest with stocks strongest in the fundamental characteristics. RevenueShares merely reallocates index constituents.

By reweighting the S&P 500 Index, RevenueShares Large Cap Fund (NYSEArca: RWL) can be easily compared with other S&P 500 Index funds, and the excess return, or lack thereof, can more likely be attributed to the methodology since the funds represent an alternative to a very popular index, tracking the same universe of stocks.

Below are three graphs illustrating the return of the RevenueShares ETF to a comparable ETF tracking the same benchmark index. The graphs all begin on Feb. 21, the inception date of the three funds.


Large Cap 

Mid Cap 

Small Cap


Clearly the performance of the three original RevenueShares ETFs is nothing to brag about. Each has under-performed the benchmark index. Performance closely tracking the index benchmark can be expected, since all stock constituents are included but only reallocated. In theory, according to RevenueShares, revenue being a "top-line item" is less prone to manipulation and therefore is a better judge for setting index weights.

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