Revenue-Weighted Strategy Applied to Dividends with Sharon French, Head of Beta Solutions at OppenheimerFunds
This article was originally published on ETFTrends.com.
The Federal Reserve has instituted three interest rate hikes in 2018, and the general consensus reverberating through the markets is that a fourth and final rate hike will cap off the year on Dec. 19. Subsequently, a confluence of rising rate fears and sell-offs in U.S. equities was enough fodder to feed a volatile fourth quarter thus far, which presented challenges for equities and fixed-income assets alike.
As these factors seep into the markets, a challenge for investors moving forward is locating an investment vehicle that can exhibit sustainable income. Bonds are the default safe-haven investment when U.S. equities go awry, and an appetite for high yield during the bull run was apparent, but they exposed investors to a high degree of downside risk associated with less- than-investment grade debt.
One option that can address risk in lieu of returns is the use of dividend-generating exchange- traded funds offered by OppenheimerFunds, which can be utilized as a high-yield tool with the added benefits of weighting an index by a particular company fundamental, revenue.
Anchoring Fundamentals with Revenue
October’s volatility was a reminder that just because investors were the beneficiaries of a decade-long bull run, it doesn’t mean strategies like traditional market cap-weighted indexes will continue to thrive, which makes the case for implementing smart beta strategies. Through smart beta, investors get adaptable exposure with a rules-based approach in conjunction with diversification via access to a broad market index.
“Something that’s more disciplined in a rules-based approach feels better for a lot of investors and thus, that’s why a lot of flows have been going to smart beta,” said Sharon French, Head of Beta Solutions at OppenheimerFunds.
OppenheimerFunds cites one fundamental approach that has contributed to the success of their income-generating funds--revenue weighting—which weights a particular index by a company’s bottom line sales, while creating portfolios that exhibit attractive characteristics: diversified exposure to the market, non-reliance on stock price, truer indications of a company’s value, and stable sector exposure.
French also attributes the success of their revenue-weighted funds by adding an additional ingredient—dividends.
“We’re now taking that opportunity to use revenue as an anchor to a company’s fundamentals, applying it to a broad universe and focusing on those companies that, on average, have higher dividend payouts, and combining the two,” said French.
The combination of revenue-weighting, in conjunction with dividend payouts, has resulted in strong performance for funds like their Oppenheimer S&P Ultra Dividend Revenue ETF (RDIV) , which now boasts a five-year track record. RDIV offers income-seeking investors attractive yield potential as well as greater exposure to lower valuation companies—an appealing alternative to investing in high-yield debt directly.
“It weeds out the companies that quite frankly are going to falter—that are not going to throw out those persistent dividends because it grounds them in the health company fundamentals,” said French.
Revenue-Dividend Opportunities Abroad
International and emerging markets present investors with an attractive value-oriented option with overseas exposure and as such, OppenheimerFunds introduced an international fund, and also an emerging markets fund-- Oppenheimer International Revenue ETF (REFA) and Oppenheimer Emerging Markets Revenue ETF (REEM) .
While international markets -- emerging markets in particular -- have seen better days, they present value propositions for the patient investor, while injecting more portfolio diversification with exposure abroad. OppenheimerFunds ETFs research has revealed that the international and emerging markets space have actually yielded higher dividends compared to the U.S.
In economies outside the U.S., economic growth remains positive, but less synchronized in 2018, as opposed to 2017, due to variations in their business cycles. Furthermore, interest rates in many developed markets remain low, causing a divergence in rate paths—factors that make the case for income-seeking investors to look abroad.
“If you do the research, it’s that much more attractive outside the U.S., so we want to take advantage of that,” said French.
OppenheimerFunds has 12 revenue-weighted ETF products domestically and internationally, including three with a 10-year track record, and the aforementioned 5-year track record with their dividend strategy.
For more information, visit www.oppenheimerfunds.com/etfs .
Disclosure Information
An investment in the Fund is subject to investment risk, including the possible loss of the principal amount invested. There is no guarantee that the issuers of stocks will declare dividends in the future, or that dividends will remain at their current levels or increase over time. The alternate weighting approach employed by the Fund (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results. Because the Fund is rebalanced quarterly, portfolio turnover may exceed 100%. The greater the portfolio turnover, the greater the transaction costs, which could have an adverse effect on Fund performance.
Carefully consider fund investment objectives, risks, charges, and expenses. Visit oppenheimerfunds.com or call your advisor for a prospectus with this and other fund information. Read it carefully before investing.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.
OppenheimerFunds is not affiliated with ETF Trends.
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