ETF Watch: Customer Satisfaction Fund Debuts

Today ETF newcomer CSat Investment Advisory, doing business as ACSI Funds, is launching its first ETF on the Bats Exchange, which owns ETF.com. The fund will base the selection and weighting of its components on the satisfaction of their customers. The American Customer Satisfaction Core Alpha ETF (ACSI) comes with an expense ratio of 0.65%.

Phil Bak, CEO of ACSI Funds, says the index underlying the fund is driven by “the intuitive idea that if people like a good or service, if they like working with a company and what the company produces, they’re going to continue to do business with that company.”

Bak’s company has been running a hedge fund with a strategy derived from customer satisfaction data for the past decade, and he notes that the index has 25 years of academic research behind it that shows that customer satisfaction does lead to outperformance.

“Our backtest does show significant outperformance within the same risk levels, or on a risk-adjusted basis. Our Sharpe ratio is about 80% higher than the S&P 500’s historically,” Bak added.

The Underlying Index

The index is based on customer satisfaction data gathered in surveys of 100,000 households that is used by companies, industry trade associations and government agencies, according to the prospectus. It primarily covers large-cap U.S.-listed companies and U.S. sector ETFs that are used to fill out the index’s sector weightings. Customer satisfaction scores are based on customer expectations, perceived quality and perceived value, the prospectus indicated.

The selection universe includes 350 companies evaluated by ACSI and representing 43 industries and 10 economic sectors. The selected companies must be U.S.-listed and meet liquidity requirements; they are weighted in the index based on their customer satisfaction scores, with some weighting constraints applied for diversification purposes. The final index has roughly 130 companies, and Bak notes that the index aims to roughly reflect the sector structure of the S&P 500.

ACSI Funds Chief Strategist Kevin Quigg describes customer satisfaction as more of a leading indicator than anything else. While many factors and evaluation criteria reflect a company’s performance in the past, customer satisfaction offers indications of a company’s future performance.

“Customer satisfaction tends to be a good precursor of earnings surprises, in particular,” he said.

Contact Heather Bell at [email protected].