There are plenty of ways to spin a sector exchange traded fund, including traditional market capitalization weighting and equal weighting. Other sector ETFs take the intelligent indexing theme further by employing growth and values into the screen process.
Then there is revenue weighting, an approach that has worked with the RevenueShares Large Cap Fund (RWL) . RWL, which celebrated its sixth anniversary last month, also features a valuation component to steer its weight away from stocks that could be perceived as overvalued. The fund is the revenue-weighted alternative to cap-weighted S&P 500 funds. [Different Spin on S&P 500 ETFs]
The RevenueShares Financials Sector Fund (RWW) shows revenue weighting can work at the sector level. RWW debuted in November 2008, a launch date that initially looked like a case of poor timing, but the ETF has managed to gain nearly 170% since then.
Weighing its 81 holdings by revenue means RWW features Warren Buffett’s Berkshire Hathaway (BRK-B) as its top holding, a rarity among financial services ETFs that are often dominated by large-cap money center banks.
Investors looking for exposure to the largest U.S. banks will not be disappointed with RWW as the revenue weighting methodology leads to Bank of America (BAC), J.P. Morgan Chase (JPM), Wells Fargo (WFC) and Citigroup (NYSE: C).
Due it revenue weighting methodology, RWW is heavy on the banks that are in focus in the wake of the Federal Reserve’s stress tests and head of next week’s results of the Comprehensive Capital Analysis and Review (CCAR) program that will show which banks can boost dividends and buybacks. [ETFs for Rising Bank Dividends]
RWW has a mere 0.18% to Zions Bancorp (ZION), the lone bank to fail the stress tests, with the bulk of the ETF’s allocated to money center and regional banks that not only aced the stress tests but appear poised to deliver increased shareholder compensation as well.
RWW charges 0.49% per year, which is well above the fees on some of the most popular cap-weighted financial services ETFs. Still, investors should be penny wise and dollar foolish. Paying an extra 30 basis points or so for RWW has worked over the past year as the ETF is up 28.6%, about 600 basis points better than the average return offered by the three largest cap-weighted bank ETFs.
RevenueShares Financials Sector Fund