ETF Expert Corner

ACSI Funds’ Kevin Quigg Spotlights American Customer Satisfaction Core Alpha ETF (ACSI)

January 3rd, 2017 by ETF Store Staff

Kevin Quigg, Chief Strategist at ACSI Funds, spotlights the American Customer Satisfaction Core Alpha ETF (ACSI), which seeks to overweight exposure to companies with the most satisfied customers.

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You can listen to our interview with Kevin Quigg by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the American Customer Satisfaction Core Alpha ETF. The ticker symbol on that is ACSI. This just launched back on November 1st, and joining us via phone from Connecticut to discuss this ETF is Kevin Quigg, Chief Strategist at ACSI Funds. Kevin, our pleasure to have you on the program today. Happy New Year to you.

Kevin Quigg: Thank you for having me. Happy New Year to you as well.

Nate Geraci: Kevin, let's first discuss the American Customer Satisfaction Index, which is what this ETF uses to select and weight its holdings. Give us some background here. Where did this index come from and what is it designed to measure?

Kevin Quigg: It has an interesting background, and again, thanks for your time. In 1994, researchers at the University of Michigan, along with Claes Fornell, who is our firm founder, who was a professor at the University of Michigan as well, along with the American Society for Quality, really set about to create an index in the true sense of the word, not the investible indices we see more commonly today, but really something that would measure the satisfaction of American consumers with the quality of the goods and services they received. It really was meant to, in a lot of ways, be a complementary piece along with the University of Michigan Consumer Sentiment Index, but this really was meant to measure and gauge the strength of the individual companies within the US economy and how satisfied their consumers and customers were with the goods and services they received.

Nate Geraci: Can you provide some additional detail on exactly how the customer satisfaction scores are calculated for individual companies? What are some of the factors that go into this?

Kevin Quigg: It's a fairly, obviously, complicated process, but it's relatively intuitive. The premise is, companies whose consumers or customers are pleased with the goods and services they receive tend to outperform companies who don't, and if you look at the process, it's really twofold. The first component is gathering the data. The American Customer Satisfaction Index, takes about 100,000 customer interviews. What they're looking for, it's a fairly long survey and they make sure they have a fairly representative sampling of the US public at large, but really what they're focusing on is perceived quality, customer expectations, perceived value, as well as customer complaints and loyalty. Really, what they're trying to do is, with each of those questions, unearth the true feelings of customers on the companies and goods and services they're using, and equally importantly, how likely they are to use that in the future. The second step in the process is really where the folks at the American Customer Satisfaction Index and the proprietary, metric model they've built come in. They take all that data and all that information they've received, and they put it into a proprietary, patented model that interprets the information, and it gives a score to each company. What it allows you to do is two things. Number one is gauge from a customer satisfaction level how companies are doing against their competitors, and at the same time, it's the first one that allows you to look cross-industry, to see what relative satisfaction numbers are in technology versus automobiles, for example.

Nate Geraci: Kevin, from an investment standpoint, if I were to maybe put this in layman's terms, is the best way to think about this that there's no better expert on the value of a company than the customers themselves, that customers are going to avoid certain restaurants if they have bad experiences or go to those restaurants if they have good experiences, and so therefore, you can sort of extrapolate that into the future performance of an individual company's stock? Is that the best way to think about it, just at a basic level?

Kevin Quigg: I think you've hit it, and the other thing I think that's important to keep in mind is that because it's unplugged from traditional financial metrics, which really are reported by the companies that are selling the goods and services, right? They tend to be a very backward-looking indicator. Things like earnings and revenue and dividends and so forth. Customer satisfaction tends to be more of a leading indicator, right? Because if you think about it, in the collective, buyers obviously have more valuable information about where they're going to be consuming, where they're going to be spending their dollars, and that allows satisfaction to, in a way, get ahead of the balance sheet, and really, it becomes a good leading indicator of future earnings and revenue and the numbers that tend to drive financial prices.

Nate Geraci: Again, we're visiting with Kevin Quigg, Chief Strategist at ACSI Funds. We're spotlighting the American Customer Satisfaction Core Alpha ETF, ticker symbol ACSI. All right, Kevin, walk us through exactly how this ETF works. What's the overall process here?

Kevin Quigg: The portfolio is designed, and it's important to keep in mind, too, that ACSI Funds have run a hedge fund for about 10 years, a traditional, long-short hedge fund, and that really was intended to utilize what we feel is very good, dynamic information in the marketplace, but it was being utilized in a hedge fund methodology. There were really no constraints, and it was a traditional long-short portfolio. For our exchange traded fund, we really tried to build something that was intended to be the core portfolio holding for your US equity portfolio, and because of that, we wanted to make sure we had diversification. We took the traditional S&P GICS sectors, and we have a 10% band around each of those sectors. In other words, we're going to make sure that, using our proprietary methodology to input the companies themselves, we're going to make sure that the industries and that the sectors represented very much reflect the broader US marketplace. Then, from an individual security standpoint, obviously using those kind of parameters from the sector perspective, we're going to choose those companies that score highest based on our proprietary ACSI methodology. Put another way, within each industry and sector, we're going to make sure that those companies that represent the greatest customer preference in the marketplace are those with whom we have the greatest weighting.

Nate Geraci: Kevin, can you give us some idea, what are some of the top holdings right now in this ETF?

Kevin Quigg: I think it's ... one thing I think I'd highlight is, while we use the S&P as our benchmark, we have about 150 securities in the portfolio, but a full third of those, or close to 40%, are non-S&P companies. I think often times, we view the world in terms of market leadership, not necessarily market cap, and while often times those are sort of synonymous, and with companies like Apple and Google you'll see very large companies with good brand leadership, but on the other hand, there are companies that are maybe not quite as capitalized, but are brand leaders, and they're ones that are in our portfolio. Some examples of that are JetBlue, right? JetBlue is a very well-thought-of company by all the customers that utilize it. With that being said, its market cap doesn't put it within the S&P, so that's a company we own. Coming off the retail season, and I think most people said it was a pretty strong retail season, a company like Dillard's Department Stores, which again, is not an S&P 500 company, but their customer satisfaction scores are amongst the leaders in their industry. Because of that, we own them in the portfolio. Finally, from a mobile perspective, T-Mobile, which is a company that we think, again, its customers have spoken, particularly the past couple of years, its satisfaction score has increased year over year, and because of that, that's a holding in the portfolio that, with a traditional S&P index, regardless of whether it's advanced beta or otherwise, you're still going to be constricted to those companies whose market capitalization is large, not necessarily those companies who are market leaders.

Nate Geraci: How many individual holdings are there in this ETF overall?

Kevin Quigg: There's about 150 or 160 names in the portfolio. We're actually going through the rebalance now, so I'll have the final number in a day or two, but it's between 150 and 160 at any given time.

Nate Geraci: You mentioned the sector constraints. I know the sector weights need to be within 10% of the overall US large cap market. Help us better understand that. Why not just limit exposure to certain sectors if there aren't enough companies showing sufficient customer satisfaction scores?

Kevin Quigg: It's not really as much driven by the number of companies within the sector, although that drives it. Really what we wanted to do, keeping in mind that we wanted a responsible investment vehicle that would really, in any customer's portfolio, allow them to use it as a core holding and be confident that they were getting exposure to all the different parts of the US market. Again, within our hedge fund, we do have the liberty and do, obviously, concentrate our positions as well as our sector exposure more, but for the ETF, we really wanted to build a core US equity vehicle that we felt allowed investors to be confident that they could use it as their main holding.

Nate Geraci: If there aren't enough individual companies to get to the targeted allocation within a given sector, you use sector ETFs to get up to that target weight, is that correct?

Kevin Quigg: We do. Some areas of the economy, particularly those that are more business to business, where there aren't as many customers, obviously, to draw information from, we take a neutral weighting by using exchange-traded funds. The reason we do that, obviously, we're fans of the vehicles. We feel they're efficient exposure. But again, we didn't want to use any of our risk budget, frankly, taking bets on sectors we didn't feel as though we had additional information on. At the same time, we didn't want to take an unintentional bet by having no exposure to those areas at all.

Jason Lank: Kevin, you just read into my question, and that is, the ACSI index, it makes sense to me that companies that satisfy their end consumer might do well in the marketplace, but there are a lot of fine companies that are B2B. They don't have an end consumer. They don't have the public in general. They're selling to other business. Are those kind of companies included in this indice, or is there a B2B version of the ACSI process?

Kevin Quigg: The ACSI itself, the organization scores for a great deal of companies, both in the US and externally, so yes, obviously we have all sorts of coverage. With that being said, in the ETF, we do have some company exposure that have some exposure B2B, but again, it's limited to our ability to gather customer satisfaction data on that. Oftentimes, we'll leave out some of the true B2B providers, and again, in those sectors like energy and areas like that, where you see more direct business to business, you'll have less exposure. With that being said, again, we don't feel as though customer input affects the security pricing as much, so it's not like we're losing our edge. Because again, that's just a segment of the market where we feel our proprietary information is not going to allow us to best take advantage on behalf of shareholders.

Nate Geraci: Again, we're visiting with Kevin Quigg, Chief Strategist at ACSI Funds. We're spotlighting the American Customer Satisfaction Core Alpha ETF, ticker symbol ACSI. Kevin, to clarify, the goal of this ETF is to outperform the S&P 500. Is that correct?

Kevin Quigg: That is correct.

Nate Geraci: Okay. Where does this ETF fit in an investor's portfolio? You mentioned earlier that this could be a core holding. Is that the primary use of this ETF?

Kevin Quigg: We see it being utilized in two ways, and really, it depends on the size of the investor, and in a few minutes we can certainly talk about the growth of the ETF industry, but as it stands today, there's really two fairly distinct types of investors. For larger investors who, for their US core exposure, have multiple different funds, perhaps they're using some sort of core holding, whether it be the S&P, but they supplement that with either a dividend-focused fund or some sort of advanced beta play, the ACSI fund is a very good complementary piece, again, because it's dynamic. Unlike those traditional financial metrics, which through time will rotate, you know, your holdings will rotate as such. Because we gauge satisfaction, which is unplugged from that, we really do have a good dynamic that moves from one market regime to another without being reliant upon those traditional financial weightings, like dividends or things like that. That could be one way to use it, but for the lion's share of investors, and again, increasingly ETF investors are regular individuals like myself and yourself that are building this long-term portfolio using exchange-traded funds. For those investors, this is a very appropriate vehicle to use as your core US equity holding. Perhaps from a diversification standpoint, obviously you own other ETFs from the fixed income and smaller, non-US base, but for your US equity holding, we feel this is a very appropriate core holding, which is why we put the constraints in place that we did, to differentiate it from the hedge fund. It'd be a more responsible holding for most investors.

Nate Geraci: That's a good segue there, because I was going to ask you, why offer this strategy in an ETF wrapper as opposed to, say, a mutual fund?

Kevin Quigg: My background, as well as my business partner Phil Bak, has been in the exchange traded fund industry, and really, we've seen the ETF industry start to fundamentally change the way people invest, for the positive, right? What it's done is allowed investors to take advantage of the structure, whether it be the tax-efficiency or whether it be the low cost, because individuals and institutions sort of roam in the same marketplace. We felt as though versus a traditional mutual fund, an ETF is a next-generation vehicle. We feel as though the future growth of the intermediary marketplace, forget about what institutions will use, but for the core investor in the US, the core average investor, the ETF is increasingly becoming their vehicle of choice. Because of that, we felt as though we could best take advantage of what we feel is our proprietary information and the ETF structure.

Nate Geraci: All right, Kevin. We have a few minutes left here. You mentioned you'd been involved with ETFs for many years now, I know you were previously Global Head of Sales Strategy for the State Street SPDR ETFs. You worked at iShares, who is currently the largest ETF provider. As the ETF space becomes increasingly crowded and competitive, what do you think it takes for an ETF like ACSI to be successful and stand out from the crowd?

Kevin Quigg: I think you hit upon it with standing out from the crowd, it's really creating differentiation. Like I said before, the ETF vehicle itself has really fundamentally changed the way that most retail investors are accessing the market, and that's a very good thing. Now, as that market continues to grow, and assets transition from traditional mutual funds and other vehicles into exchange traded funds, one of those things that's being lost is active share. It's active management and having a differentiated approach that's not cap weighted, or that's not advanced beta weighted, which is really just sort of a variation of cap weighted, but having something that truly is different. I said before that both institutions as well as retail investors traditionally use ETFs. Now, institutions, alongside ETFs, have been able to hire hedge fund managers and get differentiated return in different ways. That really doesn't exist for most retail investors, so funds like ACSI, or funds that are taking a differentiated approach or a non-traditional approach to generating performance, is really needed in the marketplace. For us, we feel as though as the market continues to expand and grow, and again, the ETF market, although it's gotten a lot of press and it continues to grow, it's still light years, from an asset perspective, behind the mutual fund industry, and that only speaks good things for the future of ETFs. Because of that, we feel as though we've built a vehicle for the ETF marketplace of tomorrow, where lots of individual investors and lots of people that are looking to save for retirement or save for different things are going to be looking for differentiated vehicles that provide return in a way that's not traditional, not in the way that everybody else has been doing it in the beta space.

Jason Lank: Kevin, you mention in one of your pieces that when viewed as a valuable, off-balance-sheet asset, satisfaction affects valuation and long-term stock appreciation. On-balance-sheet items, income statements, balance sheets, every analyst could take a look at those. Hardly an edge there. This is an off-balance-sheet asset. The information, you mentioned, proprietary, is that really the edge you're talking about? You have it, and other people may not.

Kevin Quigg: That's exactly the edge we're talking about. Again, we think it to be not only intuitive, but also a leading indicator. We feel as though if we know what the will of the people are, when the markets change or when spending goes up, the people or the companies that have shown that their customers are satisfied with them, again, this is intuitive, they're more likely to get repeat business. If you're going, if you have a discretionary dollar and you're going to dinner tomorrow, you're more likely to go someplace that you like and not someplace that left you dissatisfied last time. It's just a very straightforward approach, and again, because it takes awhile for the balance sheet to catch up with the peoples' will, often times there's pricing anomalies, for lack of a better word, that we can take advantage of with that information.

Nate Geraci: Well, Kevin, we'll have to leave it there. Boy, great spotlight today. We appreciate you joining us on the program, and we wish you a very successful 2017. Thank you.

Kevin Quigg: Thank you. Happy New Year.

Nate Geraci: That was Kevin Quigg, Chief Strategist at ACSI Funds. The ETF is the American Customer Satisfaction Core Alpha ETF, ticker symbol ACSI. You can learn more about this ETF by visiting ACSIETF.com. Also, you can learn more about the customer satisfaction index by visiting theacsi.org.