In the world of index funds, including exchange traded funds, there a few ways to skin the S&P 500 cat, with the most popular weighting methodologies being cap-weighted — the traditional way — and equal weighting.
Michigan-based Exponential ETFs is going a different, unique direction with the Reverse Cap Weighted U.S. ETF RVRS, which debuted Thursday. The new ETF tracks the Reverse Cap Weighted U.S. Large Cap Index, which represents the S&P 500 with member firms weighted by the inverse of their relative market value.
“Market capitalization weighting exposes investors to a concentrated portfolio and an extreme bias toward mega-capitalization companies, which can result in returns being left on the table,” Exponential ETFs CEO Phil Bak said in a statement. “With RVRS, we’re solving this problem and providing a tool for investors to balance out their exposure within their large cap U.S. allocation.”
A Different Look
Not surprisingly, RVRS looks a lot different than a traditional S&P 500 index fund. The new ETF's weighting methodology results in an average market value of $16 billion, a tenth of the $162 billion average market capitalization found on the cap-weighted S&P 500.
The top 10 holdings in RVRS include Chesapeake Energy Corp. CHK, Range Resources Corp. RRC and Navient Corp. NAVI, a far cry from the traditional S&P 500, which is dominated by the likes of Apple Inc. AAPL and Amazon.com Inc. AMZN, among others.
“However, contrary to most cap-weighted funds that skew their portfolio weightings in favor of the larger companies, RVRS offers investors exposure to the same U.S. large-cap equities, but instead is overweight the smaller companies of the S&P 500, which have historically performed better,” according to the statement.
Bigger Not Always Better
RVRS obviously places a greater emphasis on the smaller stocks in the S&P 500, but that's not necessarily a bad thing. Historical data indicates equal-weight S&P 500 strategies outperform cap-weighted equivalents due to equal-weight's emphasis on smaller stocks.
RVRS goes even further, exposing investors to smaller stocks that have historically outperformed their large- and mega-cap peers. The new ETF charges 0.29 percent per year, or $29 on a $10,000 investment, which is slightly below average compared to comparable domestic equity smart beta strategies.
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