Citi Rebalancing Highlights Benefits of Revenue Weighted ETFs

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August 7, 2009 2:39pm ETF BASIC NEWS NYSE:IVV

foodforthoughtThe following is an exerpt from Michael Johnston’s article from etfdb. Michael states, “So market capitalization-weighted ETFs, such as iShares’ S&P 500 Fund (IVV) and State Street’s Financial Select Sector SPDR Fund (XLF), are doubling their holding in Citi following a somewhat arbitrary corporate action (arbitrary in the sense that it in no way impacts the size of the

 company, but significantly increases the amount of common equity outstanding). Market capitalization-weighted funds, which reduced holdings in Citi as its price plunged to around $1 earlier this year, are doubling their stake now that Citi’s balance sheet is strong enough to convert its preferred stock to common. After selling low, they’re now being forced to buy high.

The RevenueShares Large Cap Fund (RWL) and RevenueShares Financials Sector Fund (RWW) take a different approach to determining the weighting for Citi (and for all of their component stocks for that matter). RWL and RWW hold the same companies as the S&P 500 and the financials sub-index, respectively, but apply a little twist when determining the weightings of each company in the funds. Instead of weighting each component according to its market capitalization, the allocation to each is based on top line revenue. Since Citi’s revenue remained relatively stable as it endured the recent market turmoil, RWL and RWW didn’t dump their holdings in the stock and aren’t now forced to up their stake. Citi’s weightings in RWL and RWW are approximately 0.5% and 3.7%, respectively, well above the allocation in similar market capitalization-weighted funds. Relative to market capitalization-weighted ETFs, RevenueShares funds will generally overweight companies that have low price-to-sales ratios and underweight those with high price-to-sales ratios. If these ratios return to their long-run average, revenue-weighted ETFs tend to outperform market capitalization-weighted funds.”

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