Hidden Gem ETFs

December 01, 2017

American Customer Satisfaction Core Alpha ETF

Edge. it’s the hardest thing find in today’s market. With the rise of big data, full disclosure and mass competition, finding a way to beat the market is incredibly hard.

That’s where ACSI comes in. ACSI draws on proprietary information that only it has—data on how much customers like or dislike the products of different companies—to pick stocks it thinks will outperform.

A “systematic informational advantage,” as chief strategist Kevin Quigg calls it. Access to those insights used to be available only in a hedge fund, but now it’s available in an ETF.

Matt Hougan, CEO, Inside ETFs: Why did you develop ACSI?
Kevin Quigg, Chief Strategist, ACSI Exponential ETFs: We felt that, with the direction the market was moving, many investors were looking for active share. We feel that the future of active management lies in utilizing active insights in an efficient ETF structure to create a win-win for investors. We wanted to give investors a super-efficient way to access what we feel is our systematic informational advantage over the market.

What is that systematic informational advantage?
One of the downsides of the proliferation of technology and the availability of data is that everyone has access to the same publicly available information. Since 1994, the ACSI has been developing our proprietary outlook on companies using the sentiments and thoughts of the people who buy goods and services from those companies.

We derive our internal view of companies as a combination of data we collect from those organizations plus our econometric models. We’re trying to identify companies that provide people with goods and services that they love, because historically that tends to be a tremendous predictor of future earnings surprises.

How do you actually build the portfolio?
Our informational advantage has been utilized for over 20 years in our proprietary hedge fund product, but since hedge funds have risk parameters that make them unsuitable for the average investor, we wanted to build a responsible investment vehicle for the masses.

We start out with the U.S. large-cap universe as defined by the S&P 500, and then within each S&P sector, we maintain a 10% band around those sectors. We then overlay our proprietary insights to overweight companies whose customer satisfaction is strong, and underweight companies whose customer satisfaction is less strong. We have about 167 companies in our portfolio.

Give me an example.
The best example would be Amazon. com. [CEO] Jeff Bezos would be the first person to tell you that Amazon is a customer-led organization. By focusing on the people who consume their goods and services, Amazon has come to dominate the space. It’s a perfect example of “satisfaction in action” as we call it, and Amazon is our No. 1 position and an overweight in our portfolio.

How does ACSI fit in an advisor’s portfolio? What does it replace?
I would describe it two ways. The primary way it fits is as a replacement for your core U.S. equity position. That’s by design, because of the sector-based diversification. The other thing it does is, in conjunction with traditional cap-weighted strategies, it acts as a portfolio buffer. Because none of our insights are linked to traditional financial metrics, ACSI is a very good complement to a traditional portfolio. We’re not in lockstep with metrics like dividends, momentum, value, etc.

When does it perform particularly well, and when does it lag the market?
ACSI is designed to provide incremental performance over the market. Over the long term, it tends to do pretty well in up markets, but it really comes into its own during down markets.

That’s intuitive: If you usually go to three restaurants a week and something happens that causes you to cut back to one, you’re going to go to the one you like the best—the one that gives you the most satisfaction. If you magnify that out to an entire economy, the companies that have the best satisfaction tend to weather storms best.

The times it doesn’t work well is when there is some sort of exogenous market impact that weakens the link between company performance and satisfaction. For instance, last year, the portfolio underperformed right up until the last month of the year. We surmised that this was related to uncertainty around the election. And in the week after the election, ACSI was up 6%, which was 2% more than the market, because that stress had been removed.

How did you price the fund?
We charge 0.65%. Our proprietary information has a cost to it. We have to conduct 100,000 interviews a year, maintain the database, etc. So our costs necessarily have to be higher than plain market beta.

At the same time, we wanted to find a space between the cost of traditional active mutual funds and increasingly active exchange-traded funds. We think it’s a sweet spot that’s more expensive than pure beta but cheaper than traditional active, and we think it provides good value to investors.

Is the fund liquid and easy to trade?
The underlying securities are, for the most part, large-cap securities, so they are extremely liquid. By utilizing a liquidity provider, you’re able to tap into that when you trade. The fund itself trades about 7,000 shares per day, which is increasing in recent months, so that liquidity supports the fund as well.

If you had to sum up ACSI in one sentence, what would you say?
Companies whose customers are satisfied with their goods and services will outperform companies whose customers are less satisfied.

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