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Sunday, July 9, 2017

Investors Need to Do Homework

This week's Barron's (page L6) has an Oppenheimer ad featuring revenue weighted etfs. The ad implies that cap weighted etfs are out of date and weighting holdings by other measures are more sophisticated. They present revenue weighted efts. They say that weighting by revenue is "the smarter way to weight the index".

One example they give has the ticker symbol RWL.

They provide a website to provide info:

Oppenheimer Revenue Weighted ETFs

Click on this page and scroll down to come to "LargeCapRevenueETF" and click on it to get performance on RWL:

What do you think when you see this little table? You may think that the ETF, RWL, matches the market but this isn't the case. These are returns based on net asset values and market prices of the ETF, which over the longer term will be close as they are in the Table.

What is really of interest is how performance has been versus the old stodgy market cap weighted S&P 500. To get that you have to click the "Performance History..." link below the Table.

This tells an interesting story as shown below:

Note the 3 year average annualized return of 9.61% on the cap weighted S&P versus the 8.31% on the touted  "sophisticated" RWL.

The longer term 5 year superior results of 15.04% versus 14.63% on the S&P 500 indicate that RWL got off to a great start. Many times investors chase the hottest concept and then run into a brick wall. For those who jumped in 3 years ago this was the case.

Actually though many investors don't do their homework and are happy with their performance in an up market. In this case they be satisfied with 8.32% and not even realize they would have gotten 9.60% with a basic cap weighted index.

Choosing between these ETFs is challenging to say the least. I tend to stick with cap weighted as a personal choice. I just think the "disrupter" type of environment we are in at the present favors the larger companies. But frankly this could be changing as the rise in interest rates may be leading to a significant rotation.

The bottom line is that investors should dig in and do a bit of research to really understand their investment portfolio.

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