This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Fundamental Funds Topped the S&P 500

The advantages of the revenue weighting became clear last year when shares of Apple (AAPL) soared. By the time the stock peaked, the iPhone maker accounted for more than 4% of the assets of the S&P 500. But the stock only was 1.1% of the assets in RevenueShares Large Cap. When Apple plunged, the downturn hurt the S&P 500 but had relatively little impact on the fundamental fund.

RevenueShares Large Cap has a pronounced tilt toward unloved value stocks. That occurs because the benchmark emphasizes low-priced stocks with hefty revenue, including Chevron (CVX) and Ford (F). In contrast, the S&P 500 gives big weightings to some hot growth names. The top 10 holdings of the S&P 500 include technology giants such as Google (GOOG).

Not surprisingly, RevenueShares Large Cap does well when value stocks are in favor. But the fund has outperformed market-cap weighted value funds. The extra juice comes because RevenueShares rebalances each quarter. To appreciate why this improves returns, consider a stock that accounts for 1% of the assets in the fundamental fund. Say shares rise and account for 1.5%.

When the rebalancing occurs at the end of the quarter, the fund portfolio managers will have to sell some of the hot shares so the stock maintains its target weighting. Say the stock dips and the weighting drops to 0.8% of assets. Then the fund would have to buy more of the depressed shares at the rebalancing.

As a result, the system requires the portfolio managers to constantly sell expensive stocks and buy cheap ones. That can be a sound investing policy. In contrast, the S&P 500 follows the opposite approach, buying expensive stocks as they rise and selling unloved issues as they drop.

Should you dump your market-cap index funds and shift to RevenueShares and other fundamental competitors? Not necessarily, says David Koenig, an investment strategist for Russell Investments, which operates fundamental and market-cap benchmarks. Koenig argues that investors can increase their diversification by holding both fundamental and market-cap funds.

Market-cap benchmarks can excel in roaring bull markets, while fundamental portfolios do better at other times. Some financial advisers have been urging clients to keep half of their passive assets in fundamental indexes and half in market-cap weighted. "By combining the two strategies, you can get a more balanced exposure," Koenig says.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
RWL $40.26 -0.79%
RWJ $55.42 -0.89%
AAPL $93.74 -1.15%
FB $117.58 0.73%
GOOG $693.01 0.29%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs