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
currently linked to those three S&P indexes, which would mean
$20 billion in assets.
How much of a difference will this Chinese private equity
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.
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'?
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
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
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
And what about your emerging markets strategy?
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.
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
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
ou're saying that when the retail people come back, they'll
be coming into ETFs and not mutual funds or whatever else?
Yes, because once they understand what ETFs are, they're going to
use ETFs because they're easier to use and they're cheaper.
What pockets of the market will you bring your
revenue-weighted ETF strategies to?
Well, we've been out there five years right now and our pretty big
ones are the RevenueShares Large Cap ETF (NYSEArca:RWL), which is
the revenue-weighted S&P 500; the RevenueShares Mid Cap ETF
(NYSEArca:RWK), which is the S&P 400 revenue weighted; and the
RevenueShares Small Cap ETF (NYSEArca:RWJ), which is the S&P
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.
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?
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.
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
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.
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.
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?
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.
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?
I do buy the argument, and here's how I see it. If you go back to
the first half of the 20
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.
So it's kind of a long-haul proposition?
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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