RevenueShares Fund Is Ripe for Rally

The PowerShares FTSE RAFI US 1000 Portfolio (PRF Quote) started an indexing segment of fundamentally weighted ETFs. The latest entrant is the RevenueShares family of funds, including the recently listed RevenueShares ADR Fund (RTR Quote). RTR takes the components of something called the S&P ADR Index, a cap-weighted index, and re-weights the constituents by revenue.

In the cap-weighted S&P version, HSBC Holdings (HBC Quote) is the largest constituent, at 3.67%, followed by BP (BP Quote), with 2.95%, and Total (TOT Quote), at 2.71%. In RTR, Royal Dutch Shell (RDS.A Quote) is the largest holding at 5.63%, followed by BP, at 4.38%, and Toyota (TM Quote), with 3.77%. The RevenueShares Web site only provides the top 10 holdings for the S&P benchmark, so it is difficult to compare most of the positions. But, in analyzing RTR, there are quite a few things that pop up.

Think about what the fund does. It weights (mostly) large-cap stocks by revenue. Over the past few years an anomaly emerged within the energy sector. The price of oil skyrocketed, including a parabolic rise to $147 a barrel. Since then, oil has dropped dramatically, as have the prices of energy stocks, slightly more so than the broader market.

The anomaly in oil shows up in the composition of RTR. With oil making all-time highs for an extended period, oil companies posted record revenue. Because of that, energy accounts for over 26% of RTR, versus only 9% in the iShares MSCI EAFE Index Fund (EFA Quote). RTR has only mid-single-digit exposure to health-care and consumer stocks, compared with 9% and 19% for EFA, respectively.

RTR will charge a 0.49% expense ratio and, although there has been no dividend declared (the fund just started trading this month), the RevenueShares Web site lists the 30-day SEC yield at 4.29%. The fund will rebalance annually.