There are ETFs representing nearly every strategy you can imagine: short and leveraged, dividend weighted, equal weighting, market cap weighting, and recently, revenue weighting.
RevenueShares has taken the revenue-weighting strategy and made it their own with six ETFs. “What we try to do is identify an index, then rank constituents of the index by company revenue and rebalance once a year, with the goal of being able to provide a higher return over time than the index would by itself,” says Sean O’Hara, president of RevenueShares.
On Friday, they launched the newest member of the fund family: the RevenueShares Navellier Overall A-100 Fund (RWV). The fund is constructed using an 8-factor model to give stocks a letter grade. From there, the top 100 A-rated stocks are included and ranked by revenue annually on Sept. 1, and rebalanced on the first day of each calendar quarter.
The creator of the eight-factor model, Louis Navellier, got into replicating indexes 25 years ago with Wells Fargo, and wound up beating the index. “Why would you want to index the S&P 500 when you could take then top 200-400 constituents with better risk controls?” asks Navellier’s Portfolio Manager Michael Garaventa.
Why revenues? Because it’s a number that’s difficult to fudge.
O’Hara points out that dividends can be adjusted, earnings can be moved around by taking writeoffs and doing fancy accounting. “There’s nothing I can do to adjust top-line sales or revenue numbers. It’s a more consistent number to look at.”
Another reason the provider has gone with revenues is because all companies have a revenue.
Garaventa says the index caps any single weighting at 7%. Even a giant like Wal-Mart (WMT), which has strong sales, will never be weighted at more than 7%.
The hope is that if the RevenueShares fund takes off, it will demonstrate what Navellier is capable of. “We’re looking for companies that have solid fundamentals – sales growth, earnings growth. And people are buying these stocks based on those reasons,” he says.
“We hope it’s a great success.”