RevenueShares, the ETF firm that uses revenue screens to optimize well-known S'P indexes, is perhaps the least-known of the fundamentally focused players in the ETF world—among them Rob Arnott’s indexing firm Research Affiliates, and WisdomTree. But all that is about to change, according to Vince Lowry, chairman of RevenueShares’ parent, VTL Associates.
Lowry told IndexUniverse.com Managing Editor Olly Ludwig that the recent $7 million investment his firm received from a Chinese private equity firm will help RevenueShares raise its marketing game and get the word out about data showing how weighting stocks based on their revenue streams delivers outperformance.
That means taking the more than $450 million in its three biggest funds that revenue-weight the S'P 500, MidCap 400 and SmallCap 600 to a whole new level, and also bringing new funds to market, such as the dividend-focused and emerging-markets-focused strategies RevenueShares put into registration last month . In all, Lowry reckons RevenueShares could capture at least 5 percent of the $400 billion now invested in ETFs currently linked to those three S'P indexes, which would mean $20 billion in assets.
IU.com: How much of a difference will this Chinese private equity firm make?
Lowry: Our firm is profitable now. But what we needed was a big boost in marketing efforts, as well as the ability to launch more funds. As you know, it’s costly to launch the funds, and we need to get them to $30 million to $40 million to have one that breaks even. But the main issue is really to ramp up marketing efforts.
IU.com: We’ll circle back to China, but let’s focus on the U.S. for a moment. The dividend and emerging market strategies you plan to bring to market are big trends in the marketplace, particularly the dividend piece. What is your “fundamental” approach to these two markets? How do you differentiate it from WisdomTree’s or Research Affiliates’?
Lowry: We’re going to use the universe of the S'P 900. It’s basically the S'P 500 and S'P MidCap 400. We feel the optimum numbers that take the top 60—within that universe—eventually works out to be around 22 to 27 out of the MidCap 400 and the rest of the S'P 500 60. Then we look at a weighted average over the last four quarters so that we see that they’re consistent dividend payers, and try to eliminate anybody that may seem inconsistent.
At that point, we’ll then revenue-weight them with a cap on any given security of 10 percent. And every quarter, we will again select the top dividend payers from that universe and then revenue-weight them. I don’t want to get into trouble because we just filed it, but our backtesting tells me that it will be the best dividend performer in both yield and performance out there.
What’s important is we use an existing index provider—S'P mostly. And we take the circle of champions already selected for us by S'P, and then revenue-weight them, and we’ve been able to clearly demonstrate with live portfolios for five years that it’s a better model to take their selection process and revenue-weight it.
IU.com: And what about your emerging markets strategy?
Lowry: We’re using the Bank of New York’s emerging dividend index, and we revenue-weight it. We compare it to other international indexes and emerging market indexes, and we come up with a very strong product. Once you revenue-weight, you really turn the Bank of New York ADR Emerging Market Index's solid performance into superior performance. It really comes down to the revenue. The fact that they’re ADRs, I think, really eliminates accounting issues. As you know, those companies have to submit their financials similar to what the U.S. companies do just to be in ADR. So we think that screen is very, very helpful.
IU.com: You now have a cash infusion; the ETF industry is maturing, but isn’t fully accounted for; and you’re staking your claim. You have a few strategies that are successful. Tell me what you see as the more viable corners of the U.S. market going forward.
Lowry: I disagree with you just slightly that the ETF market is maturing. I think it’s still in its infancy.
I believe we haven’t seen the endowments come in yet—we haven’t seen the major institutions come into the ETF market yet. Also, people think the market’s matured because the retail investor has been sitting on the sideline since ’08. They’re not in, but they’ll be back.
IU.com: Y ou’re saying that when the retail people come back, they’ll be coming into ETFs and not mutual funds or whatever else?
Lowry: Yes, because once they understand what ETFs are, they’re going to use ETFs because they’re easier to use and they’re cheaper.
IU.com: What pockets of the market will you bring your revenue-weighted ETF strategies to?
Lowry: Well, we’ve been out there five years right now and our pretty big ones are the RevenueShares Large Cap ETF (RWL), which is the revenue-weighted S'P 500; the RevenueShares Mid Cap ETF (RWK), which is the S'P 400 revenue weighted; and the RevenueShares Small Cap ETF (RWJ), which is the S'P 600.
Now, if you look at those three nonrevenue indices and you see the ETFs covering the space, right now there’s about $400 billion invested in the ETFs that are built around those indices And we don’t think we’re delusional thinking that since we have a better mousetrap and we use the exact same indexes—only revenue-weighted—we could get 5 or 10 percent of that market [$20 billion to $40 billion]. We’d be very happy over the next three to five years taking in that type of number.
IU.com: A re you saying you’re going to be relatively modest in expanding into new areas and will concentrate more on marketing existing strategies more aggressively?
Lowry: Yes, we do want to market existing funds. But we’re going into the new areas because what I want to do is basically provide investors with the ability to create a global asset allocation model using indices that are known. But we offer those same indices revenue-weighted so that they have the option to go with the fundamental weighted like ours with a known index.
IU.com: So you’re basically saying you’ll cast a wide net, but you’ll pick your spots very carefully and time any launch very carefully. Is that a fair summation of what you just told me?
Lowry: That’s very fair. We’re not going to be the folks that put out 10 or 15 and then shut five down. We’ve never shut down an ETF. We have no intention to. But “never say never.” We have no intention of it at this point. When we launch, we’re going to be very deliberate and do a lot of market intelligence. We believe there’s going to be good solid demand for the revenue-weighted dividend product we have out there.
IU.com:Let’s talk about China a bit. Obviously the Chinese are interested in the U.S. market. How could they not be? It’s the biggest ETF market. But if I understood correctly, you’re going to be a partner for them in potentially bringing strategies to market in China itself.
Lowry: We’re now embarking on trying to understand the regulatory environment in China and what it means, because we’ve identified a couple of indexes we want to do there. It can be a little bit murky. But we’re going to spend some serious legal fees to try and get a fundamental understanding of it so that we can get ourselves into that market.
As you know, under the current regulations, we here in the U.S. can’t sell there, but there are ways to, we believe, potentially get listed there and develop products over there. But it’s not easy. We’re not going into this naively. But our investors believe they can be very helpful on that end. Again, there’s a big regulatory environment, so we have to make sure we get it right. It won’t be next month that we do something.
IU.com: And you could bring to the U.S. market China-focused strategies that you can formulate in part because of your experience on the ground in China?
Lowry: That’s fair, because that’s what we’re doing; we’re looking at a couple right now. In fact, we’re going to be the subadvisor on several KraneShares coming out that are A-shares. We’re already familiar with them.
IU.com: How do you respond to the objection—and this would apply to KraneShares too really—that a lot of Chinese investors are more stock-pickers than asset allocators at this point in time? Moreover, they tend to make their purchases of these kinds of products through large institutions on the ground there. If not that, they’re comfortable, if it’s legally possible, to purchase U.S.-listed securities to get the exposure they desire wherever those securities are targeting. So for anyone who wants to market ETFs there, as you may be interested in doing, then maybe it’s a bridge too far? Do you buy that?
Lowry: I do buy the argument, and here’s how I see it. If you go back to the first half of the 20 th century, between 1900 and 1950, America was dominated by single-stock purchasers. Bernard Baruch, Joe Kennedy, all these guys made their money with single stocks. There weren’t big mutual funds around. The small guy wasn’t in the market. These were big investors that bought stocks; they didn’t buy mutual funds.
And then along came Merrill Lynch in the early ’50s. They went out and they hired all these ex-Marines from World War II, and Charlie Merrill got the middle-class investor to begin to think about investing—and not just in stocks, but professional management like mutual funds. And that turned Merrill Lynch into the biggest investment broker-dealer in the world.
Not that I’m Charlie Merrill, but we see ourselves as going to China and saying, “Look, you’ve got 300 million people in middle class now, that’s the size of the U.S. alone. And you’re probably going to bring another 300 million.” The Chinese get some money and they want to be a consumer. They’re no different from us. So there’s no reason we don’t think the middle class will become investors, and not just stock-pickers.
IU.com: So it’s kind of a long-haul proposition?
Lowry: Well, back then it took 50 years. But with today’s distribution of information and the rapid movement of people and transportation and information, now it might take five or 10 years.
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