The Revenue-Weighted S&P 500 Is Smoking The Regular S&P 500

Notwithstanding the rockiness of the last six weeks, U.S. stock markets have had a very good first half in 2013. Drilling into the market is revealing.

The S&P 500 Index, represented by the ETF (exchange-traded fund) whose symbol is SPY (SPDR S&P 500 ETF), had a total return of 13.74% for the first six months of the year. The performance is one of the best first halves in recent times. If one examines the S&P 400 Mid Cap Index for the same period, the result is 13.81% when calculated using the ETF whose symbol is MDY (SPDR S&P Mid Cap 400 ETF).

Most notable is the outperformance of small-cap stocks. The S&P 600 Small Cap Index is captured by the ETF whose symbol is IJR (iShares Core S&P Small Cap ETF). That security had a total return of 16.29% for the first half of the year. Thus, approximately 2.5 additional points of return were obtained by representative diversification into small caps versus mid caps and large caps.

Note we are still within the S&P 1500 Index. The stocks that make up this index pass the screening and selection committee of Standard & Poor's. We will keep this commentary focused on the S&P 1500. That said, there is ample evidence in other sections of the nearly 6000 tradable stocks that dramatic underperformance or outperformance occurred.

One of the pronounced features of this year's first half is the persistent outperformance of revenue-weighted indices over capitalization-weighted indices. One can reach into the same stock market index basket using RevenueShares ETFs rather than the standard capitalization-weighted references from S&P. For example, RevenueShare Small Cap ETF (RWJ) had a performance for the first half of the year of 16.84% versus IJR at 16.29%. In other words, if you selected a revenue-weighted ETF structure versus a capitalization-weighted ETF structure in the small-cap arena, you would have added another 60 basis points to your returns for the first half of 2013.

This difference gets more dramatic when you look at the Mid Cap 400 Index. RevenueShares Mid Cap (RWK) delivered a 19.42% total return versus the capitalization-weighted MDY return of 13.81%. A total return 5.61% higher was a dramatic gain to be realized by using RevenueShares rather than capitalization weighting in the mid-cap sector. Mid caps by capitalization weight were essentially the same as large caps. The revenue-weighted ETF dramatically outperformed the cap-weighted one.

What about RevenueShares Large Cap? Here too, revenue weighting added excess return to an investor's portfolio. Let's compare RevenueShares Large Cap ETF (RWL) with its cap-weighted cousin (SPY). The total return of RWL for the first half of 2013 was 17.11%. The return for SPY was 13.74% for the capitalization-weighted distribution of the same stocks. In other words, you netted about 3.5 more points of return in six months by using a revenue-weighted ETF rather than a capitalization-weighted ETF.

RevenueShares ETFs had a stellar first half. They outperformed capitalization-weighted ETFs in small, mid, and large caps, though the component stocks within each of the ETFs are essentially the same. The major difference between the two ETFs is the stock weighting system used within them.

A note for readers and clients: Sometimes we get lucky. In the interest of full disclosure, which in this case is pleasant to offer, Cumberland Advisors can accurately say it is a holder of the RevenueShares Large Cap ETF (RWL) and Small Cap ETF (RWJ).

We do not hold the RevenueShares Mid Cap ETF. Oh, well, you cannot win all of them.

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