Forget Earnings Slowdown, Bet On Revenue-Weighted ETFs

The Q4 reporting cycle has started on a weak note with deceleration in earnings growth. This is especially true as earnings from the 77 S&P 500 members that have reported Q4 results so far are up just 14.2%, much lower than Q3 growth of 19.3% and also below the pace set in the first three quarters of the year. Earnings surprise of 70.1% is also tracking below the historical periods. In fact, the Q4 EPS beat percentage is the lowest since Q4 2016.

However, revenue trends seem encouraging with revenue growth of 8.1% for the S&P 500 companies that have reported so far. In fact, it is in line with Q3 growth and is tracking the elevated pace of the last few quarters. Revenue beat of 62.3% is also above the previous reporting cycle and is moving toward recent quarterly trend rates (read: Top ETF Trends for 2019).

Further, revenue growth is expected to outpace earnings growth this year. This trend can easily be depicted from the below chart:

Against such a backdrop, revenue-weighted ETFs are expected to take lead over earnings-weighted strategies, and could be potential outperformers this reporting cycle and the next.

Revenue-Weighted ETFs

Revenue-weighted ETFs have outperformed their earnings counterparts over both the short and long-term periods, proving the credibility of the superior-weighting methodology. This is because revenues are a better indicator of a company’s financial health. The top line is harder to manipulate or alter on a quarter-by-quarter basis as opposed to earnings that can easily be manipulated using accounting tricks thereby leading to inaccuracy.

With the Fed being cautious on rates hike, the U.S. dollar will likely trend downward, providing boost to the top line of multinational companies. This will further fuel revenue-weighted ETFs (read: Dovish Fed Minutes Should Boost These ETFs).

As a result, tilting toward the revenue metric is a sensible choice this year. For investors seeking to do this, there is a small lineup of U.S. focused ETFs that accomplish this task. Below, we have highlighted the funds that could be great choices for investors seeking to make money from the slowdown in earnings growth this year while at the same time focusing on one of the most important aspects of stock investing.

Oppenheimer S&P 500 Revenue ETF (BE:RWL)

This fund consists of the same securities as the S&P 500 Index, weighted by top line revenue instead of market capitalization. Holding 504 stocks in its basket, the fund is slightly concentrated on the top firm Wal-Mart (NYSE:WMT) at 4.5% of total assets while other firms hold no more than 2.2% share. Healthcare, financials, consumer discretionary, consumer staples, industrials and information technology are the top six sectors making up for a double-digit exposure each. The ETF has amassed $962.5 million in its asset base and charges 39 bps in annual fees. Volume is moderate trading in about 80,000 shares a day. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Large Cap ETFs here).

Oppenheimer ESG Revenue ETF ESGL

This fund provides access to the top 50% of securities in the S&P 500 Index by ESG score, excluding those with a detrimental score for controversies, and is weighted by revenue instead of market capitalization. It is home to 241 stocks with each holding no more than 4.2% share. From a sector look, information technology, healthcare, consumer discretionary, industrials, and consumer staples receive double-digit exposure each. The ETF has been able to manage $28 million in AUM while trading in a paltry volume of around 3,000 shares, suggesting wide bid/ask spread beyond the expense ratio of 0.40% (read: Small Caps Taking Charge of the Bulls: 6 ETF Winners YTD).

iShares Russell 1000 Pure U.S. Revenue ETF AMCA

This ETF has amassed $10.6 million in its asset base and trades in paltry volume of 3,000 shares a day on average. It offers exposure to American companies that generate 85% or more of their sales from the United States by tracking the Russell 1000 Pure Domestic Exposure Index. It holds a well-diversified basket of 406 stocks as none accounts for more than 3.82% share. However, one-fourth of the portfolio is tilted toward financials while healthcare, communication, consumer discretionary and utilities round off the next spots with double-digit exposure each. The product charges 15 bps in annual fees and has a Zacks ETF Rank # 2 (Buy).

Oppenheimer S&P Financials Revenue ETF (BE:RWW)

This ETF offers investors targeted access to the same stocks as the S&P 500 Financials Index but weighs each security by revenues instead of market capitalization. It holds 69 stocks in its basket with a large exposure to Berkshire Hathaway (NYSE:BRKa) at 14.1% while other firms hold no more than 6.2% of assets. The product has AUM of $40.6 million and average daily volume of 4,000 shares. It charges 0.45% in expense ratio and has a Zacks ETF Rank #2 (read: Why Bank ETFs Can Continue to Rise Despite Mixed Q4 Earnings).

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