Major equity indexes, including the S&P 500, continue hovering around all-time highs. If advisors and investors are going to quibble about anything, though, it’s that the cap-weighted versions of those gauges aren’t as diverse as they once were. Indeed, concentration risk is palpable. Just look at the S&P 500, where the top five holdings combine for about 26% of the index’s weight. Fortunately, there are other ways to approach the S&P 500, including the often overlooked revenue weighting methodology, accessible via the Invesco S&P 500 Revenue ETF (RWL ).
The $9.44 billion RWL, which turned 18 years old in February, tracks the S&P 500® Revenue-Weighted Index. As its name implies, that index weighs components by the revenue they earn. Its approach is highly relevant today, because when the index rebalances, it caps members’ weights at 5%. That diminishes some of the concentration risk found with the cap-weighted S&P 500.
A Good Time to Consider RWL
RWL and the revenue weighting methodology may not get the kudos they deserve, because the strategy works over the long-term and those benefits extend beyond large-caps.
“The S&P 500 Revenue-Weighted Index has outperformed the S&P 500 as well as the S&P 500 Equal Weight Index across both short- and long-term periods. This trend extends to mid- and small-cap equities; the S&P MidCap 400 Revenue-Weighted Index and S&P SmallCap 600 Revenue-Weighted Index have also outperformed their respective equal- and market-cap-weighted benchmarks,” noted Wenli Bill Hao of S&P Dow Jones Indices.
For long-term investors, RWL offers another source of allure. It doesn’t just have the potential to beat the cap-weighted S&P 500. It has a knack for being the better risk-adjusted bet.
“[The] revenue-weighted indices also showed superior risk-adjusted performance compared to their equal- and market-cap-weighted counterparts, across both short- and long-term horizons,” according to Hao.
Plus, from a valuation perspective, the cost of admission to the ETF is attractive relative to cap-weighted equivalents.
“The S&P 500 Revenue-Weighted Index was trading at lower valuation ratios compared to both the S&P 500 and the S&P 500 Equal Weight Index. This trend has also been observed historically over the long term… Additionally, the mid-cap and small-cap revenue-weighted versions consistently demonstrated lower price multiples relative to their respective benchmarks,” said Hao.
Indeed, RWL leans into value sectors, as healthcare and financial services combine for about 35% of the ETF’s roster, compared to 21.1% in a cap-weighted S&P 500 ETF.
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