Sales are a company’s lifeblood and the foundation of its success, but investors generally focus on earnings that are often manipulated after passing through various accounting filters.

RevenueShares, a division of Philadelphia-based RIA and investment consulting firm VTL Associates LLC, is so focused on the top-line that it’s in its name and is the basis for its suite of seven revenue-weighted exchange-traded funds.

Thanks to a licensing agreement with Standard & Poor’s, RevenueShares takes certain S&P indexes and converts them into its own revenue-weighted indexes that underlie six of its funds. With most of these funds, RevenueShares’ indexes contain the same securities as their benchmark S&P indexes, but in different proportions based on their revenue.

RevenueShares’ six S&P-related funds are based on the S&P 500, S&P 500 Financials Sector, S&P 400, S&P 600, S&P 900 and the S&P ADR indexes. 

The seventh fund is linked to the Navellier Overall A-100 Index, which is based on the quantitative methodology employed at Navellier & Associates Inc. that seeks to identify the 100 highest quality U.S. stocks. As with the S&P-related funds, the RevenueShares index underlying its Navellier-focused fund is a revenue-weighted reworking of the benchmark Navellier index.

RevenueShares rolled out six of its funds in 2008 and 2009, and earlier this month launched its seventh fund, the RevenueShares Ultra Dividend Fund (RDIV), which provides exposure to the 60 highest-yielding dividend stocks in the S&P 900. The stocks are ranked by the average 12-month trailing dividend yield in each of the previous trailing four quarters. RDIV tracks an index that yields 4.92 percent, one of highest of all U.S. dividend focused ETFs.

The fund has an expense ratio of 0.49 percent, and its largest allocations comprise the utilities, telecom and consumer staples sectors.

VTL and RevenueShares founder Vince Lowry says the new fund is based on his belief that we’re in a long-term secular bull market where interest rates will remain low for an extended time period. “Given that environment, we wanted our next venture to be a dividend ETF,” he says.

True Economic Measure

Along with VTL’s consulting work for institutions, the company provides advisory services in the areas of ETFs and separate account management to institutions, RIAs and broker-dealers. When it decided to launch its own funds, it wanted an approach that gave it an edge against the competition. It began with the premise that the S&P 500 outperforms 80 percent of money managers over the short term and nearly all of them over the long haul.

“We concluded that whatever the S&P is doing, it’s doing it well,” Lowry says. “And we further concluded that the only way to beat the market is to beat the index that is the market.”

Lowry wanted to avoid the perceived shortcoming of cap-weighted indexes, and he zeroed in on revenue as a true measure of a company’s economic value. “A revenue- weighted strategy forces investors to purchase more shares of stocks with low price-to-sales ratios and fewer shares of stocks with high price-to-sales ratios than other strategies,” he says. “Over time, this strategy results in outperformance.”

He backtested his thesis with S&P, and the two inked an agreement that allows RevenueShares to launch revenue-weighted funds based on S&P indexes. The first three RevenueShares funds––RevenueShares Large Cap Fund (RWL), RevenueShares Mid Cap Fund (RWK) and RevenueShares Small Cap Fund (RWJ)––launched in February 2008, and had time to gain traction before the market crashed.

Through this year’s third quarter, all three funds have outperformed the S&P indexes they’re based on since inception and during the year-to-date, one-year, three-year, five-year time frames. They’ve all attracted at least $150 million in assets. RWK and RWJ have expense ratios of 0.54 percent, while RWL is 0.49 percent.

Three other funds––RevenueShares Financials Sector Fund (RWW), RevenueShares ADR Fund (RTR) and RevenueShares Navellier Overall A-100 Fund (RWV)––launched during the teeth of the recession in late-2008 and early-2009 and have lacked the broad-based success of the older funds.

RTR has underperformed the S&P ADR index since inception, whereas RWW and RWV have outperformed their related benchmark S&P indexes. Both RWW and RTR sport expense ratios of 0.49 percent, and have attracted $30 million and $23 million in assets, respectively. The Navellier fund has an expense ratio of 0.60 percent, and has attracted only $7 million in assets.

“RWV is a niche play for momentum managers,” says Lowry, noting that momentum has been a tough place to be in recent years.

RevenueShares believes it’s the only ETF sponsor whose core investment strategy is based on revenue weighting. Robert Goldsborough, an ETF analyst at Morningstar, won’t quibble with that assessment. “There’s no question they’ve carved a distinctive niche in the marketplace,” he says.

From Cop To China

Lowry earned a B.S. degree in political science and an MBA from St. Joseph’s University in Philadelphia. But before he began his career in financial services, he spent 12 years with the Philadelphia police department where he patrolled the streets before getting promoted to sergeant in the detective bureau and later developing a police academy training program on when officers should or shouldn’t shoot.

Lowry’s road to RevenueShares went through Smith Barney/Citigroup, where prior to forming VTL in 2004 he was a managing director in Smith Barney’s consulting group. Today, he’s ready to take his RevenueShares to a higher level after a period following the recession when it pared back its sales force and laid low. But the company has new fund ideas it wants to launch, and it needed cash to make that happen.

Lowry says he was approached by several U.S. investors before a law firm headed by a former SEC official introduced him to a Chinese entity that wanted to get a foothold in the U.S.

In May, VTL sold a 22 percent stake of itself to Dalian, China-based Suzhou Industrial Park Kaida Venture Capital Investment for $7 million. Most of that money will be used to expand RevenueShares’ business. In return, Lowry says his company will help its Chinese partners provide education and help further develop China’s equity capital markets, including ETFs.

And Lowry hopes someday to sell RevenueShares funds in China. “We’re a long way off from that because there are a lot of regulatory issues,” he says.

With extra cash on hand, RevenueShares in July hired eight people to boost its marketing and distribution staff to expand its ETF line-up. And despite the recent lack of a sizable sales force behind them, the track records of RevenueShares funds have landed them on numerous platforms in the financial advisory industry. Lowry says 75 percent of the funds’ roughly $600 million in total assets have come from the Merrill Lynch, Morgan Stanley and Wells Fargo platforms.

“We’re getting a lot of business from LPL, too,” he says, adding that mid-sized ETF managers who create their own ETF model portfolios for advisor clients are building positions in RevenueShares funds.

One such firm, Cumberland Advisors in Sarasota, Fla., currently uses the RevenueShares Small Cap Fund for its clients. David Kotok, Cumberland’s chief investment officer, says he uses revenue-weighted, equity-weighted and cap-weighted strategies at different times in the market cycle. And he offers that the current environment of positive inflation of less than two percent, slow yet steady economic growth of about two percent and some––but not spectacular––jobs growth indicates a cycle of rising prices.

“That will reflect in top-line growth first,” Kotok says. “So a little bit of inflation and accelerated growth show up in revenue-weighted schemes.” He adds that he favors small caps right now because he believes the U.S. economy is leading the developed world out of its collective funk and that smaller U.S. companies are domestic plays that should benefit from rising pricing power.

As for RevenueShares, now that the Ultra Dividend Fund is on the market the company expects to have more funds in its pipeline.

“The next thing will be to go international because even though the global markets’ recovery will be slow, the equity markets will be the only place to be over the next five to 10 years,” Lowry says.

The company recently put the RevenueShares Emerging Market Fund in registration with the Securities and Exchange Commission. According to its prospectus, the fund’s underlying index will be a revenue-weighted version of the benchmark BNY Mellon Emerging Markets 50 ADR Index.