Revenue-weighted ETF offers alternative to cap-weighted S&P 500

Invesco’s S&P 500 Revenue ETF (RWL) assigns weights to companies based on the revenue they generate and caps individual holdings at 5% when the underlying index rebalances. The ETF tracks the S&P 500 Revenue-Weighted Index, held about $9.44 billion in assets and reached its 18th year in February.

The revenue-weighting method gives larger allocations to firms with higher sales instead of larger market capitalizations. The index enforces a 5% cap at rebalance to reduce the influence of a small group of very large firms; in the market-cap-weighted S&P 500 the five largest holdings account for roughly 26% of the index.

S&P Dow Jones Indices reports that revenue-weighted indexes have outperformed both market-cap and equal-weighted peers over short- and long-term periods. Wenli Bill Hao of S&P Dow Jones Indices noted, “The S&P 500 Revenue-Weighted Index has outperformed the S&P 500 as well as the S&P 500 Equal Weight Index across both short- and long-term periods.”

The index provider also highlighted similar patterns in other size segments. Wenli Bill Hao added, “The S&P MidCap 400 Revenue-Weighted Index and S&P SmallCap 600 Revenue-Weighted Index have also outperformed their respective equal- and market-cap-weighted benchmarks.”

S&P Dow Jones Indices reported that revenue-weighted indexes showed stronger risk-adjusted performance compared with their equal- and market-cap-weighted counterparts and that they have generally traded at lower valuation multiples historically across large-, mid- and small-cap universes.

RWL’s sector mix differs from a cap-weighted S&P 500 fund. Healthcare and financial services together represent about 35% of RWL’s weight, versus roughly 21.1% for those sectors in a cap-weighted S&P 500 ETF, reflecting the shift in exposure toward firms with higher sales.

Adoption of revenue-weighted indexes remains smaller than that of cap-weighted benchmarks. RWL provides an ETF vehicle that delivers the revenue-weighted version of the S&P 500 for investors seeking that specific exposure.