Does Revenue Weighting Work?

After touching market lows on March 9th, 2009, major stock indexes were on an absolute tear until early May. And certain ETFs that weight stocks by various fundamental measures were soaring even higher.

Year-over-year performance data from market lows to early March 2010 show just how well revenue weighting stocks has worked. The RevenueShares Large Cap Fund (RWL), RevenueShares Mid Cap Fund (RWK) and RevenueShares Small Cap Fund (RWJ) each outperformed their respective benchmarks by a handsome margin.

The RevenueShares ETFs own the same stocks within the S&P 500, S&P Mid Cap 400 and S&P Small Cap 600 but with one key difference: Companies aren’t weighted according to their market capitalization or size, but rather their top line revenues.

“The revenue-weighted strategy purchases fewer shares of high price-to-sales stocks and more shares of low price-to-sales stocks,” states Sean O’Hara, president of RevenueShares. According to O’Hara, this strategy reinforces the “buy low, sell high” strategy. He adds, “Periods of economic recovery amplify the benefits of this approach by favoring companies with high revenues instead of those that rely on cost-cutting.”