The ‘Customer Is Always Right’ ETF

Two recently launched funds look at customer satisfaction and brand value as key metrics in picking stocks.

Reviewed by: Drew Voros
Edited by: Drew Voros

Phil BakPhil Bak is the CEO of ACSI Funds & Exponential ETFs. He is widely regarded as an expert in the management, development and trading of ETFs. Prior to joining ACSI, Bak was a managing director at the New York Stock Exchange, where he initiated market structure enhancements and worked with asset managers, regulators and liquidity providers to ensure a fair and orderly secondary market for ETFs. caught up with Bak to talk about his company’s new ETFs based on customer satisfaction and brand value, and how those two ideas can be investable. Last November, your firm launched its first ETF, the American Customer Satisfaction Core Alpha ETF (ACSI). How does it select its underlying stocks?

Phil Bak: The American Customer Satisfaction Index is our sister company. It’s a private company, and it creates the data.

It has a proprietary economic model it uses to translate the data, and then we have an exclusive license on the data to create the investable index, what we call the ACSII, which is the American Customer Satisfaction Investable Index.

We use the index data to create a more traditional portfolio, manage things like sector constraints and some basic risk levels, and use that investable index for the ETF. The last presidential election showed us just how off polls can be. Who are you surveying, and why do you feel this is reliable data?

Bak: One of the things we saw around the election was that polling is not always 100% accurate. But what was even more glaring is that the difference between polls can be pretty dramatic:  different methodologies are used, as well as how those polls manage their sample and their demographics, and how questions are phrased.

Polls are not the same, and an interview or a survey is not the same as another interview or survey from somebody else. It’s crucial that people understand the quality of the data they’re getting is rigorous and has a process in place that makes sense.

The ACSI data was created at the University of Michigan by researchers. We have several Ph.D.s that work on it today. There is a proprietary economic model involved, and we normalize for over seven demographics.

What really makes this data special is we’re not polling people for their opinions on goods and services and companies that they have not directly interacted with. We’re drilling down to find the exact specific customers of companies. We survey people who have actually bought a certain car.


For example, I might think Tesla is a really cool car, but I don’t own one, and I’m probably not going to own one within the next few years. My opinion of Tesla is not as important as somebody’s who has driven or owns a Tesla. If you’re trying to figure out when Tesla’s earnings are going to catch up to the sentiment, you need to understand specifically from those buyers.

A lot of people are now talking about the shift from retail to online. There’s a big difference between how customers feel about different retailers and those retail experiences.

Anybody can have an opinion and say, “Well, Macy’s is terrible, but I love going to Lord & Taylor,” or whatever it is, but if you talk to the customers and the people who actually go to those stores and you say, “Hey, are you going to keep coming back? Are you going to start buying online?” you might hear different stories based on different stores.

It’s really essential that you get a massive sample size—not only of people who have opinions but also of people who have opinions of companies that they’ve done business with. What is the sample size?

Bak: We interview over 100,000 people each year. We don’t include companies in our portfolio if we can’t get a large enough sample that we can have conviction on the company. And how do you contact these people?

Bak: They are contacted primarily through online surveys. ACSI’s top holding is Amazon, at 3%, and you go all the way down to fractional holdings. This seems to be equal-weighted.

Bak: It’s not. What we do is a little bit different than most other funds, in that the sensitivities or the elasticities of different companies in different sectors toward their customer satisfaction scores are quite different.

Look at Chipotle. Let’s say 20 people get sick at a Chipotle, and globally they see a massive dip in customers coming into their doors immediately, very disproportional to the damage that was actually done.

Contrast that to a company like Wells Fargo, where there were many more people who were impacted by Wells Fargo’s business practices. And the people who were impacted were impacted much, much worse than just getting food poisoning for a couple days.

However, we saw much less of an impact on Wells Fargo’s business. That’s because a bank has a much lower level of elasticity towards customer satisfaction than fast food restaurants, so we take that into account.

We take a look at each sector and what the different company ratings are and select companies we like, and then we weigh companies within each sector by their relative customer satisfaction.

So we’re not comparing Amazon to Ford. We’re comparing Amazon to companies that do what Amazon does. Because of that, we may have more stocks in one sector than another. If we have fewer companies in a specific sector, then the amount of weight that gets divvied up by those companies can be higher or lower than the amount of weight that gets divvied up by another sector. It might end up looking a little bit like equal weight. And then you have another fund, the Brand Value ETF (BVAL). What’s the difference between brand value and customer satisfaction?

Bak: Brand is a bigger, more encompassing concept. The brand includes the total favorability and the total impression of a company that people have, and the brand is a bit of an anchor value, as we see it.

If a company has a good brand, but they have poor financials, then they have a lot of potential to be able to fix those financials or to be able to address the underlying fundamental problems. You’re not trying to catch a falling knife if you buy an undervalued company that has a strong brand; you’re buying a company that has a very high potential for a mean reversion.

The way we manage the BVAL portfolio is as a mean-reversion play. We’re looking not for the highest-rated brands, we’re looking for the biggest discrepancy between market value and brand value. We consider that more of a satellite portfolio.

When we look at companies from a customer satisfaction standpoint, it’s a narrower focus. The customer has already transacted with that company. That tells us more about the likelihood for repeat buying and the likelihood for word-of-mouth referrals. And it tells us whether the company has pricing power over their customers.

Contact Drew Voros at [email protected]


Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at and ETF Report.