The Reverse Cap Weighted U.S. Large-Cap ETF (RVRS) gives investors a unique avenue for accessing the S&P 500. Simply put, RVRS takes the smaller members of the S&P 500 and moves those stocks to head of the line while moving large- and mega-cap names to the lowest weights.
RVRS seeks to reflect the performance of the Reverse Cap Weighted U.S. Large Cap Index, which is comprised of S&P 500 constituents. However, the fund places greater emphasis on the bottom of the large-cap market, essentially turning the S&P 500 upside down.
Not only can RVRS be an alternative to the cap-weighted S&P 500 (SPY ), it be used in place of the S&P 500 Equal Weight Index (SPEWI).
“Historically, in environments in which SPEWI outperforms SPX, we would expect Reverse to outperform them both,” said Exponential Director of Capital Markets Josh Blechman in a recent note. “Conversely, in environments where SPX outperforms SPEWI (as is the case over the last three years) we would expect Reverse to be the worst performing of the three.”
Sizable Results for RVRS Benefits
RVRS results in a weighted average market cap that is both significantly lower than market-cap-weighted large-cap funds, and significantly higher than mid-cap funds. Portfolios that allocate to market-cap-weighted versions of large, mid and small-cap now have a tool to gain exposure to a sizeable gap in their holdings.
In terms of where the fund can fit into a portfolio, investors can be tactical with their capital allocation since RVRS can be used as a standalone product or in conjunction with an S&P 500-focused ETF for broad exposure to equities. Adding RVRS to the mix gives investors the diversification via smaller cap exposure to the S&P 500.
Additionally, RVRS’s underlying index has, with slightly more volatility, outperformed the rival cap-weighted and equal-weight iterations over long periods of time.
“This additional return (and the relationship to SPEWI) is partially derived from the higher Size (SMB), Value (HML) and Anti-Momentum (MOM) factor loads expressed in the Reverse Index, relative to the other S&P weighting schemes,” said Blechman. “Reverse merely places additional load on the factors that drive differentiation between SPEWI and SPX.”
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