Individual ETF Investors May Wish To Lean Toward Revenue Beaters

Includes: OEF, RWL
by: Gary Gordon

It may be too early to declare that the “do whatever it takes” rally is dead in the Mediterranean Sea. After all, there is still a fair amount of interest in buying broad market stock ETFs on weakness.

For example, on Wednesday (10/10/12), block trading institutional investors snatched up shares of the iShares S&P 100 (NYSEARCA:OEF) on 12x the normal trading volume. The activity increased OEF’s net assets under management by an attention-grabbing 3%.

By the same token, there are equally intriguing contradictions. For instance, since Mario Draghi’s July 26 pledge to do anything and everything to get the eurozone through its debt crisis, the percentage of S&P 100 stocks above a long-term moving average had collectively remained above a 200-day trendline. That is, they were able to hang in there until yesterday (10/9/2012). In fact, with more selling taking place on Wednesday (10/10), one can expect the slide to be even more pronounced.

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It is difficult to visualize an October surprise where buyers completely throw in the towel on Apple or the broader U.S. market. The large-scale block purchases of OEF demonstrate that sell-offs on global growth concerns are not new. They also demonstrate the strength of the world’s central banks to act as a backstop.

On the other foot, forward-looking earnings estimates in a stagnant economy are likely to decline and disappoint. It follows that plenty of money managers are going to look for a margin of safety. They’ll focus on corporations with increasing revenue prospects (a la price-to-sales), rather than hitch a ride on an earnings express (a la price-to-earnings).

What might this mean for ETF enthusiasts? It may mean that you can find lower volatility and greater price stability in a revenue-weighted vehicle. The one that comes to mind is the RevenueShares Large Cap Fund (NYSEARCA:RWL).

Due to the fact that RWL is ranked by revenue, not by market cap size, the top holdings represent some of the most predictable revenue stream winners around. For example, RWL’s top holding is Wal-Mart (NYSE:WMT), which reported a 4.5% revenue increase last quarter.

Over the last month and the last three months, this exchange-traded tracker has outperformed all but one of the nine S&P Style indices (Large Cap Value). Presently, it is above a 50-day, as well as its 200-day.

Unfortunately, RWL typically serves up 30,000 shares in daily trading volume ($800,000 in dollar volume). This is not as attractive for institutional investors who purchase tens of thousands of ETF shares in bulk, and who trade with some degree of frequency. Yet an individual investor who believes that revenues are much more difficult to manipulate than profits, or who believes that lower P/S (price-to-sales) ratios reflect greater bargains, may want to lean toward this revenue-weighted index fund.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.