From Kevin Quigg, ACSI Funds Chief Strategist: Despite being the driving factor behind many individual companies’ business models and success, customer satisfaction has never been fully utilized by most investment professionals as a tool in identifying superior companies.
Part of this lies in the difficulty of gathering reliable customer satisfaction data (which captures the sentiment of those buying a company’s goods or services) as opposed to easily available traditional financial metrics (provided by the sellers of those same goods and services during public financial disclosures like earnings, for example). As the pool of ETFs continues to become increasingly saturated with monolithic products based on the same few financial metrics, investors and financial advisors should seek products incorporating unique, differentiating insight to add value to their portfolios.
Unplugged from traditional financial metrics
Throughout the last two years, more than 500 ETFs made their debut on public exchanges. Increasingly these products are based on “advanced beta” methodologies that attempt to track indexes weighted by companies’ momentum, value, dividends, market beta and stock price volatility. While many of these strategies reward investors with returns in certain time periods, they vary greatly in terms of performance due to their reliance on any one of these factors prevailing in the market at any given period.
Simply put, it is very difficult for investors and financial advisors to position their portfolio of ETFs on the front end of favorable trends while looking at backward looking financial statement data.
Customer satisfaction, on the other hand, is an off-balance sheet asset that provides compelling insight into a particular company’s future performance. Customer satisfaction is unplugged from traditional financial metrics that come from earnings releases, Form 10-Qs and other publicly available information. The data comes from customers themselves, not from the companies that receive their business. Because of this unique insight, an investor’s view on a company is constantly updated based on the current views of those who ultimately determine a company’s success ? their customers.
As opposed to waiting for a company to report information, utilizing the collective customer view on how they feel about a certain company’s products and services provides unique foresight into the future of that company’s performance.
Getting in front of the balance sheet
This is the very premise behind the American Customer Satisfaction Index. The Index measures the satisfaction of the U.S. buying public with the quality of products and services offered by both foreign and domestic firms with significant share in U.S. markets. The proprietary data is gathered by surveying roughly 100,000 customers about the products and services they use the most. The survey results serve as inputs to an econometric model that benchmarks customer satisfaction with more than 350 companies in 43 industries and 10 economic sectors.
This groundbreaking research was developed in 1994 by Claes Fornell, Professor Emeritus at University of Michigan’s Ross School of Business along with researchers at the University of Michigan and the American Society for Quality. The index was initially created as a tool for academic research and governmental financial modeling prior to it being utilized as a signal for investment management.
Twenty-two years of research has led to the discovery that customer satisfaction can be utilized as a leading stock performance indicator, as opposed to “lagging” indicators that form the basis of most ETF index strategies. This means the unique methodology utilized in the index can, with varying degrees of certainty, predict the future stock performance of a given company. Customers know what they like and are going to buy before individual companies do. By aggregating and normalizing the collective customer experience with a given company, customer satisfaction data can actually forecast traditional financial statement items commonly used by other ETFs. Utilizing customer satisfaction is particularly effective in identifying the future earnings surprises that have great impact on stock performance.
Assuming one can effectively gauge customer satisfaction, this premise is intuitive; customers know where they are going to spend their dollars prior to the companies who benefit from that spending. Therefore, when attempting to figure out which restaurant, retailer or airline will get the most business, wouldn’t you want to speak to the customers instead of the companies?
The ACSI ETF
The American Customer Satisfaction Core Alpha ETF (ACSI ETF) debuted in November 2016.
This ETF offers investors exposure to a diversified collection of U.S. companies in every sector of the economy. The fund differentiates itself from traditional ETFs through its use of ACSI’s proprietary customer satisfaction model as the basis for security weighting. It closely tracks the American Customer Satisfaction Index, which optimizes its weightings based on proprietary customer satisfaction information quarterly, and weights securities based on their ACSI score. This unique product allows investors to blend differentiated, active insight with the efficiency of the ETF structure.
The fund also provides exposure to companies outside the S&P 500 that have market leadership and strong customer satisfaction. As of December 31, 2016, approximately 33 percent of the fund’s holdings are comprised of names like Vonage (1.65 percent), Papa John’s (0.40 percent) and T-Mobile (1.40 percent) that possess extremely high levels of customer satisfaction, but are not large enough to be captured by other broad index-based ETFs.
As the ETF continues to grow as the vehicle of choice for many investors and the financial advisors who manage their assets, the industry will continue to see more products come to market. We believe the key to being successful in this thriving industry lies in creating unique, differentiated solutions that allow investors to utilize non-traditional thinking to move “outside the box” and separate from the herd.
The American Customer Satisfaction Core Alpha ETF (BATS:ACSI) was unchanged in premarket trading Friday. Year-to-date, ACSI has gained 3.26%, versus a 4.73% rise in the benchmark S&P 500 index during the same period.
An investor should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus or summary prospectus contain this and other important information about the Fund and are available at acsietf.com or by calling 734.882.2401. Please read the prospectus or summary prospectus carefully before investing.
Investing involves risk. Principal loss is possible. The securities of large-capitalization companies may be relatively mature compared to smaller companies and therefore subject to slower growth during times of economic expansion. The Index relies heavily on proprietary quantitative models as well as information and data supplied by third parties (Models and Data). Because the Index is composed based on such Models and Data, when such Models and Data prove to be incorrect or incomplete, the Index and Fund may not perform as expected. As with all index funds, the performance of the Fund and its Index may differ from each other for a variety of reasons. For example, the Fund incurs operating expenses and portfolio transaction costs not incurred by the Index. In addition, the Fund may not be fully invested in the securities of the Index mat all times or may hold securities not included in the Index. Investments involve risk. Principal loss is possible. The Fund has the same risks as the underlying securities traded on the exchange through the day. Redemptions are limited and commissions are charged on each trade, and ETFs may trade at a premium or discount to their net asset value. Shares of the American Customer Satisfaction Index ETF may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from the Fund by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
Alpha measures a portfolio’s risk adjusted performance and represents the difference between a portfolio’s actual performance and its expected performance given its level of risk as measured by beta. Beta is a means of measuring the volatility of a security or portfolio of securities in comparison with the market.
The American Customer Satisfaction Investable Index uses an objective, rules-based methodology to measure the performance of large capitalization U.S.-listed companies whose customers have been surveyed and who have been assigned a customer satisfaction score by ACSI, LLC. The Index utilizes sector constraints to reflect the overall U.S. large cap market, and weights securities based on the Customer Satisfaction Data.
The S&P 500 Index is a market capitalization-weighted index focused on the large-cap segment of the market. The index is comprised of 500 of the top companies in leading industries in the U.S. economy It is not possible to invest directly in an index.
Diversification does not assure a profit or protect against a loss.
The American Customer Satisfaction Core Alpha ETF is distributed by Quasar Distributors, LLC.
This article is brought to you courtesy of ACSI Funds.
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