Revenue Shares Financial Sector ETF (RWW) is a financial ETF that is weighted based on company revenues, not the usual market capitalization.  This subtle difference has created an ETF that has substantially outperformed the S&P Financial ETF (XLF) since its inception in Oct 2008 – even though both hold the same stocks just different allocations. 

Revenue Shares Financial Sector favors financial stocks that represent the largest revenue generators in the sector, regardless of the sub-class or market capitalization.  This focus leads to an interesting portfolio of large financial stalwarts.  The weighting concentrates the portfolio with 85 stocks, but the top six positions comprise 41% of assets and the top 11 comprise 60% of assets.  Below is the latest portfolio of the top six stocks:

Berkshire Hathaway               13.33%

JPMorgan Chase                     7.29%

Bank of America                     6.35%

Wells Fargo & Co                    6.16%

MetLife Inc                              4.87%

American Insurance Group     4.61%

Rounding out the top 11 positions, Prudential Financial (PRU), Goldman Sachs Group (GS), Morgan Stanley (MS), Allstate (ALL), and American Express (AXP) each comprise between 2% and 3% of assets.

According to Morningstar, a $10,000 investment in 2008 would be worth almost $27,000 today compared to $21,000 for a similar investment in S&P Financial ETF XLF.  

Below is a price chart from Nov 1, 2008 to current showing RWW increased by 162% (blue line) vs a 132% increase for XLF (red line). 

Source: bigcharts.com

Morningstar offers the following total return calculations.  While not seeming like much, the few percentage points outperformance of RWW has translated into a meaningful difference since 2008.  Below are annual returns per M*. 

Source: Morningstar

The sub-industry breakdown of the top 20 positions of RWW and XLF reveals the difference in asset allocation.  The top 20 for RWW comprises 72% of assets while the top 20 for XLF is a smaller 62% of assets.  RWW has a higher allocation to insurance companies while XLF has more allocated to banks, credit card companies and REITs.  Below is a breakdown of the major sub-industry allocations of the top 20 positions of each ETF:

                                    RWW               XLF

Insurance                    38.2%              13.5%

Banks                           27.4%              34.5%

Investment Banks          5.8%                6.9%

Credit Card, REITs         1.6%                7.3%                         

Below is a list of the top 20 positons of each ETF:

Source: Morningstar, Guiding Mast Investments

Expense ratios are a bit higher with RWW at 0.46% vs a fee of 0.15% for XLF.

In addition, RWW rebalances its portfolio quarterly while XLF alters only when the underlying index changes.  As specific companies increase their revenues faster than their respective competitors do, it is reflected as a higher allocation in the ETF.

The underlying ETF index is managed by VTL Associates LLC, which has introduced several revenue-weighted ETFs.  From a 2013 article in Financial Advisor magazine concerning revenue-weighted ETFs:

“We concluded that whatever the S&P is doing, it’s doing it well,” founder Vince Lowry says. “And we further concluded that the only way to beat the market is to beat the index that is the market.”

Lowry wanted to avoid the perceived shortcoming of cap-weighted indexes, and he zeroed in on revenue as a true measure of a company’s economic value. “A revenue- weighted strategy forces investors to purchase more shares of stocks with low price-to-sales ratios and fewer shares of stocks with high price-to-sales ratios than other strategies,” he says. “Over time, this strategy results in outperformance.”

With its higher allocation to insurance and specifically overweighed in Berkshire Hathaway (BRK-A, BRK-B), it is surprising the ETF has not caught on.  With assets of just $32 million, RWW is a small fish in the financial ETF pond.  Nevertheless, it's a fish that is ripe for investors.