CEO and Chief Strategist of ACSI Funds on Their New Customer Satisfaction ETF

ETFdb.com (ETFdb): Please tell us about yourselves and the career trajectory that led you, Phil, to become the CEO and you, Kevin, Chief Strategist at ACSI Funds.

Phil Bak (P.B.): I was very fortunate in my prior role as a Managing Director at NYSE in that I was able to see the burgeoning ETF industry through multiple lenses – the product and distribution side from the issuers that I worked with, and the regulatory and capital markets side from the NYSE. As the popularity and growth of the ETF structure persisted, more firms were looking to build differentiated products that would meet investor demand. However, I felt that many new ETFs became increasingly disconnected from the language of everyday investors. ETF traders and investors were looking for strategies that not only have a rock-solid investment thesis, but are also connected to the portfolio companies, products and services in a more tangible way. Like everyone else, my own purchasing decisions have been largely dictated by my personal experiences. For example, I’ll avoid certain airlines, restaurants and businesses based on bad encounters. When I discovered the ACSI data, I saw it as a way to apply my experience-based buying decisions in a broad way. After an exhaustive review of the efficacy of the data, as well as the research and the math that powers the ACSI scores, I knew we were on to something that would solve a problem for investors.

Kevin Quigg (K.Q.): I spent the past 18 years working at two large ETF sponsors, SPDRs and iShares, in various capacities that allowed me to spend time with all types of clients using ETFs. While ETFs have grown to be a meaningful part of the investment landscape, their growth as a core tool for financial advisors and the clients they serve is particularly notable. I joined ACSI Funds because there is an opportunity to fill a gap in the ETF marketplace. Strategies utilizing proprietary information and research to outperform the broader equity market are missing in the ETF toolbox for advisors. ACSI Funds provides a differentiated alternative to traditional cap- or factor-weighted ETFs. American Customer Satisfaction Core Alpha delivers the “active” performance investors seek, while doing so in a rules-based ETF. We are at the front end of the next generation of ETF solutions, and having a chance to be a part of that is exciting.

ETFdb: What is ACSI Fund’s strategy and mission?

P.B.: Our research shows that companies who have satisfied customers will do better than their competitors over the long term. The level to which existing customers report loyalty and inelasticity tells us about a company’s revenue prospects, and their level of satisfaction tells us about the quality of their goods and services relative to expectations. There is no better expert on the value that a company is providing to their customers than the customers themselves. Our mission is to deliver this thesis using the world’s most authoritative data and research, and to deliver it to our clients in an efficient and transparent way.

K.Q.: Our firm’s founder, Professor Claes Fornell, is a leading academic authority on the relationship between customer satisfaction and security performance. Dr. Fornell and the University of Michigan created the American Customer Satisfaction Index in 1994 as a means of measuring the consumer sentiment of the American buying public across economic sectors and industries. Customer satisfaction has been shown to be a leading indicator of many traditional financial metrics, including revenue and earnings. When used as an investment factor, it allows us to identify companies we feel are poised for growth prior to that sentiment hitting the balance sheet, which drives more traditional financial forecasting.

ETFdb: Looks like ACSI Funds has recently filed for their first ETF on November 1. Could you tell us what motivated the decision to launch the American Customer Satisfaction Core Alpha ETF (ACSI)?

P.B.: As investors shifted from actively managed mutual funds to passive ETFs, we saw a need in the market for a core holding that attempts to deliver alpha above the benchmark, but does so in a sustainable and transparent way. Essentially, the best of both worlds. So we built the ACSI ETF as a core holding. We invest in approximately 160 large-cap companies and manage our sector exposure so that any outperformance (or potential underperformance) is the result of security selection and not due to inherent biases built into the index methodology. This allows the ACSI ETF to be used for the same general exposure from a passive large-cap domestic index fund, or a broad core U.S. actively managed mutual fund.

ETFdb: The ETF just seems to hold popular equities, such as Johnson and Johnson, Apple and HP. What criteria are used to pick those holdings and how are those holdings able to track the only U.S. cross-industry measure of customer satisfaction, the American Customer Satisfaction Index?

P.B.: Most of the companies in the (ACSI C+) ETF are large-cap domestic equities. Our criteria is that we are able to gather a large sample of customers that we can normalize based on a number of criteria such as age, gender, geography, income, etc. By weighting the stocks within each sector by their relative customer satisfaction scores instead of by market capitalization or other traditional investment factors, we are able to tilt the portfolio performance towards those companies that have exhibited the highest levels of customer satisfaction, without causing mapping issues to the large-cap U.S. allocation.

ETFdb: What type of investor should hold or trade the ACSI?

K.Q.: ACSI Core Alpha is designed to outperform the broad U.S. market indexes (i.e. S&P 500). It is for investors looking for a diversified, risk-controlled, cost-effective core holding in their portfolio. For those managing ETF portfolios more tactically, the fund is also an ideal optimization tool alongside funds utilizing traditional strategic beta factors. We envision this being a core building block for financial advisors in client portfolios.

ETFdb: Given that Donald Trump won the presidential election, do you think that will have any substantial effect on the American Customer Satisfaction Index?

K.Q.: From an index perspective, we are capturing the relationship between customers and the brands they buy, so the election result should not affect us in that way. For the fund, the resolution of the presidential election (regardless of outcome) is a positive. As outcomes for different companies and industries change with the Trump Administration’s policies, ACSI’s unique methodology will allow us to identify market leaders ahead of traditional financial metrics

ACSI is a unique ETF that tracks the American Customer Satisfaction Index. According to Mr. Quigg, it’s designed to outperform U.S. equity markets. That’s exciting for almost any investor that is looking to gain exposure to large-cap U.S. based equities. In particular, ACSI is in ETFdb’s Large-Cap Blend Equities category. For a deeper analysis on individual ETF investments such as ACSI, use our ETF Analyzer tool. You can select ETFs by category or type as well as add individual ticker symbols to compare performance, expenses and dividend yield, among other metrics.

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