Credit: Shutterstock photoTaking a well-known index and re-weighting it is nothing new in the exchange-traded fund world. Issuers of smart beta funds have been doing it for decades now with mostly successful results. The purest measurement of that positive effect is the increasing adoption of these tools into investor portfolios, most of which are seeking equity allocations that differ from the conventional benchmark.
Yet when it comes to some of the most storied indexes such as the S&P 500, it’s difficult to imagine any more creative ways to slice up the pie. There are over a hundred ETFs that use the S&P 500 as the parent index in one way or another. Some selectively pull stocks out of the main pool based on specific factors, while others attempt to re-distribute capital away from the market-cap weighted standard. Both paths have strong merits and are worthy of evaluation for U.S. stock exposure.
A relatively new company called Exponential ETFs found a new direction of its own. The Reverse Cap Weighted U.S. Large Cap ETF (RVRS) includes all 500 components of the stalwart S&P and shifts money towards the smaller companies in the index. Think of it as turning the S&P 500 on its head. The net effect is to promote greater performance weights towards relatively smaller stocks versus the traditional dominance of Apple (AAPL), Microsoft Corp (MSFT), and Amazon (AMZN).
The top three holdings in RVRS right now are Range Resources Corp (RRC), Navient Corp (NAVI), and Trip Advisor (TRIP). While not completely obscure altogether, these components are almost a non-factor in the traditional weighting scheme of the SPDR S&P 500 ETF (SPY). The reverse weighting methodology increases overall portfolio diversification because there is less concentration in mega-cap stocks. It also re-distributes the sector exposure compared to SPY as well.
Probably the closest competitor to this method is the Invesco S&P 500 Equal Weight ETF (RSP), which has nearly $14 billion under management and a 15-year track record. RSP gives each of the S&P 500 Components an equal weighting within the fund. Numerous studies and real-world results have supported the notion that promoting smaller stocks and minimizing the effect of larger companies within a diversified index provides similar, if not superior returns over long time frames.
RVRS has had very similar performance as RSP in the seven months since its launch. It would not be hard to imagine this fund starting to diverge more over time as it establishes a more prominent track record through a full market cycle.
It’s interesting to note that RVRS is also charging a reasonable expense ratio of 0.29% for access to this strategy. That’s compared to 0.20% in RSP and 0.095% in SPY. The embedded expense is modestly higher than its primary competitors, but not overly prohibitive for investors that are seeking a core large-cap U.S. equity fund.
In my opinion the creators of this fund got several things right with this initial launch. They have selected an index with tremendous liquidity and name-brand appeal for virtually all investors. They have priced it competitively and with the ability to lower fees over time as its size grows. It would not be a stretch to imagine this reverse weighting method being used for other market cap segments or even large foreign stock benchmarks as well.
The Bottom Line
Investors who want the to own the basket of S&P 500 stocks with a skew towards smaller companies would be well served to consider RVRS in their research efforts. It’s worth noting that the emphasis on smaller companies may promote enhanced volatility, but also access to new growth opportunities as well.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
