ETF Expert Corner

Exponential ETFs CEO Phil Bak Spotlights Brand Value ETF (BVAL)

August 8th, 2017 by ETF Store Staff

Phil Bak, CEO of Exponential ETFs, spotlights the Brand Value ETF (BVAL), which seeks to invest in companies whose brands appear undervalued by the market.  Phil also discusses the competitive ETF landscape and offers his thoughts on current U.S. stock valuations.


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

Nate Geraci: The first guest we have for you today is Phil Bak, CEO of Exponential ETFs. This is a new ETF platform, established by ACSI Funds, and Exponential's first ETF, the one we'll be spotlighting today, is the Brand Value ETF, ticker symbol BVAL. This just launched back in June and it tracks an index developed by Brandometry, with the idea being to invest in companies whose brands appear to be undervalued by the market. Phil is joining us via phone today from Ann Arbor, Michigan. Phil, our pleasure to have you on the program.

Phil Bak: Hi, Nate. Thanks for having me on.

Nate Geraci: Phil, before we get to the ETF, I just mentioned three different companies: Exponential ETFs, ACSI Funds, and Brandometry. For our listeners, can you give us some background here? How are these three companies intertwined and what's your involvement with them?

Phil Bak: I'm the CEO of both ACSI Funds and Exponential ETFs. ACSI Funds is run out of Ann Arbor, Michigan. We have a hedge fund and an ETF that capitalizes on the ACSI data, which is proprietary data we own, and our sister company, and the reason why we have the name ACSI in the fund and company name. Really, the focus is on quantifying customer satisfaction and understanding how to use that data as a leading indicator in the stock market. Once we built the ACSI Funds’ team and we had the best product manager in the industry, the best capital markets guy in the industry, the best ETF strategist in the industry, we were trying to figure out how to use our capacity to allow other partners that we thought had great ideas and great ETFs to be able to get to market, and get to market efficiently. So we created Exponential ETFs as a way to partner with other asset managers to be able to build their ETFs.

Nate Geraci: Phil, can you tell us a little bit more about your background? How did you first get involved with ETFs?

Phil Bak: Sure. So I had a very unlikely - a long and unlikely path into ETFs. I was a terrible student. I attended 11 different schools, I had behavioral problems as a student, but I got very good advice when I was becoming an adolescent, which was focus on things for, in terms of career and what you want to do, focus on something that you're good at and that you love doing. Well, the two things that I loved were math and music, and I was a terrible musician, so I decided to focus on math. Without much of an academic pedigree, there really weren't many places I could go, and after a brief stint, I got drafted by the Israeli Army and came out with kind of a renewed sense of purpose and managed to get myself a trading spot right in the middle of the dot com bubble, and really was in the right place at the right time to get into ETFs early from there. I had done product development for a couple of start-up ETFs issuers, and as they say, you learn a lot more from failure than you do from success. That was very much the case, and ended up at the New York Stock Exchange for six years, where I got to see the market structure and the regulatory side of the business. I had a terrific mentor in Laura Morrison, who's now doing amazing things at the Bats Exchange. And about a year and a half ago, I broke off to start ACSI Funds.

Nate Geraci: Alright, so let's talk about the Brand Value ETF, again, ticker symbol BVAL. This seeks to invest in 50 US stocks where the companies’ brands appear to be undervalued by the market. Explain to us the process here. How is this ETF constructed?

Phil Bak: So just to kind of set the table here, we believe that quantifying intangible assets is the next frontier in stock valuation. If you look at intangible assets, they're pretty much absent from security valuation models in the public market, but in the private market, they're a tremendous, tremendous part of any company's valuation. In fact, the Philly Fed just put out a study estimating that there's eight-trillion dollars of the US economy that's tied to intangible assets. So we spend a lot of time trying to figure out how can we quantify and how can we use big data capabilities to be able to better quantify intangible assets? What Brandometry does is they partnered with a group called Tenet Partners, and they have a process where they start with the Wilshire 500, and they conduct over ten thousand interviews with thought leaders in this space to identify familiarity, investment potential, favorability, reputation, and perception of management. And from that filtered-out universe, they can now identify discrepancies between brand value and market value. And if you really think about it, the brand is a bit of an anchor, right? So the brands have value, and you can't dispute that. If you go into any CVS, you'll see that the generic Advil costs 60% of what the brand name does, or you can go to your mall, and you can find a polo shirt for $15, or a Polo shirt for $70 dollars, depending on what brand is on the shirt. So what Brandometry does is they're looking for discrepancies between brand value and market value. So they identify that as the unrealized value, using the brand as a bit of an anchor in the valuation and allowing the companies to be mean reversion plays, because with these strong brands, they can now revert back to their price, capitalizing on the brand that they have, and favorability that they have with their customers.

Nate Geraci: Is there maybe a company or two in this ETF that you could point to that provides a really good example of how a brand is undervalued? I know all 50 holdings are theoretically undervalued from a brand perspective, but what's a good example of company that maybe listeners might be familiar with?

Phil Bak: Yeah, I think Tiffany's is a good example. Tiffany's, of course, is a very strong brand, known globally. The stock was down for several years. It came into the index in 2016 and saw a sharp rebound once it came back into the index. Another one that you might think of is Harley Davidson, where from an unrealized value standpoint, as a value stock, the stock had declined for some time, and there's some value metrics on Harley Davidson that are looking strong. Accordingly, it came into the index right around that time to capitalize on that.

Nate Geraci: As you mentioned, this ETF is looking at the broader universe from the Wilshire 5000, and then obviously whittling down to the 50 companies that demonstrate the biggest price discrepancy between share price and the unrealized overall brand value. How are the holdings in this ETF weighted?

Phil Bak: They're equally weighted. Once they’re in, they'll drift from there. There's no specific sector cap, but we do have exposure to just about every sector, including basic materials and energy to a very small degree. So it's not a consumer fund, but it is a go anywhere fund. We consider this to be a satellite strategy that can provide some portable alpha. So it's not diversified in terms of sector. It's not concentrated either. Right now there's 34% in consumer cyclicals, and that's by far the highest sector weighting.

Nate Geraci: Our guest today is Phil Bak, CEO of Exponential ETFs. They're behind the Brand Value ETF, ticker symbol BVAL. Phil, from an investment thesis standpoint, as you mentioned earlier, clearly brands have value. But purely from an investment standpoint, why focus on brand? Why is that potentially a better way to go about selecting stocks?

Phil Bak: Well, if you believe in efficient market hypothesis, then you're starting with the assumption that stocks right now are priced in with all publicly available information taken into account. So that includes all fundamental and technical factors, and there are no secrets anymore. So if you want to tilt your portfolio towards value or small cap to try to get some alpha, well, those stocks that you're going to screen for, they're already priced given the market expectations. Everyone's looking at those same factors. So the only way to consistently beat the market, in our view, is to have some sort of informational advantage that's not already being priced into the market. And that's where intangible assets come in. As far as we're concerned, the trick, the hard part here is in quantifying intangible assets and taking that data and finding the opportunity, the investment opportunity that that data provides.

Nate Geraci: I'm curious, what does the historical data say on this? You know, obviously this strategy of focusing on brand value and intangible assets, this was back tested prior to launching the ETF - and we always point out that a back test is just that, right, it doesn't speak to what may happen moving forward - but what does the historical data look like?

Phil Bak: Well, that's exactly right. You can't always rely on a back test moving forward, but it's important to differentiate between a back test where the data, the source data on the brands were - for the Brandometry index - were all published in sample, over the ten years, over time, by Tenet Partners. So that data, you can't go back and recreate the data and say, "Well, we would have or would not have liked a certain brand." We have tremendous sample size data that was all published in sample, and if we go back over the course of that data being published, we can see some very nice risk adjusted alpha in the back test. For the details, you have to go to the index provider, but that data is very much publicly available.

Nate Geraci: Phil, obviously BVAL is unique in its approach to US stocks and as you mentioned earlier, you're also CEO of ACSI Funds, who offers the American Customer Satisfaction Core Alpha ETF. That holds companies with higher customer satisfaction scores – certainly, a unique strategy as well. Conor and I were discussing earlier that we think this is the right approach to launching new ETFs, because obviously all of the plain vanilla exposure is well covered, and really all of the traditional factor exposure is spoken for as well. Momentum, value, small cap. But I'm curious, how do you view the ETF landscape right now just in terms of competition and how you go about thinking through potential new launches?

Phil Bak: There's tremendous opportunity in the ETF space right now, tremendous opportunity. I think right now we're seeing a lot of people confusing two different trends. There's a move towards index investing, and there's a move towards the ETF vehicle. The move towards index investing would happen with or without the ETF. People would be using either mutual funds or futures contracts or SMAs or whatever it is to access those same indexes. The ETF structure, the ETF vehicle has some efficiencies over other vehicles out there, especially the mutual fund obviously, but people aren't really talking about the hedge funds. Hedge funds are not terribly liquid, it takes a long time to get your assets out, there's very little transparency, and the fee structure is absurd in today's environment. Completely absurd. So the migration towards the ETF vehicle allows people to take strategies that would historically be hedge fund or alpha type strategies that can command a fee that is appropriate for the data that is, especially if there's proprietary data or proprietary systems in order, to put together that alpha. And then, you're not in the same fee war that you are with broad cap weighted indexes. I think it's fair to say that the hot new product of 2024, it either hasn't launched yet, or if it's launched, nobody's talking about it today. The financial industry cannot lose its curiosity. There's going to be new ways of doing things. When we look at modern portfolio theory and the development over the last 25 years, there have been some incredible breakthroughs for clients and for investors, but to think that we've reached a pinnacle of investment knowledge, and there's no better way to do things, and there will never be a better way to invest is ridiculous. So the ETF is very well-suited to be the vehicle under which those new strategies can take advantage of the efficiencies that the ETF has inherent in it.

Nate Geraci: We're visiting today with Phil Bak, CEO of Exponential ETFs. Phil, you mentioned fees. I'm curious, what about fee pressure? As I look at BVAL, it's certainly competitively priced at 65 basis points, especially when you compare that to actively managed mutual funds, but it is more expensive than plain vanilla exposure. How do you view the pricing environment for ETFs right now and what do you think is the right balance on fees?

Phil Bak: Investors are right to focus on fees, and fees are the only certainty. The alpha is uncertain. What you're going to get is completely uncertain. The data cost and the cost of being an ETF issuer are of no concern to the investor. They're worried about what they're paying and what they're getting. But what I think might be getting lost is that cost benefit is more important than cost, and if a product can, using proprietary data, consistently provide alpha, then it is fair to command a higher fee. But people will be skeptical, and they have a right to be skeptical. So over time, as funds can prove their value in the market, and can prove that their value in excess of a seven basis point fee, I think investors will be willing to pay it. But in the short-term, there's no doubt that there's a huge fee compression going on, and we don't see that changing any time soon.

Nate Geraci: Alright, we have just a couple of minutes left here. Before we let you go, I'd love to hear any general thoughts you have on US stocks right now. Obviously, it's been a good year so far. The S&P 500 is up about 12%, but there does seem to be some growing concerns over valuations. What's your take on US stocks right now?

Phil Bak: Well PEs are high, and the VIX is incredibly low. And you can look at that and see two things. You can look at that and see a great environment to invest in stocks because everything looks great. Or, you can look at that and say there's a mean reversion that has to come at some point. Now, how that mean reversion manifests itself can be in the form of inflation or increasing earnings, or a better business environment, or it could be in a decline in stock prices. We are not market timers. What I think investors really need to focus on is positioning their portfolio for the long term, understanding the risks in their portfolio and in the products that they're in and being able to stomach any potential losses. But ultimately, right now, we see really strong consumer data, which is something that we focus on. We see strong sentiment data. And like I said, with the VIX being low, the market could stay irrational a lot longer than you could stay solvent, so I'd be concerned about trying to be a market timer in today's environment.

Nate Geraci: Well, Phil, we'll have to leave it there. Tremendous insight today. We certainly appreciate you joining us on the program, and best of luck to you with the Exponential ETF platform. Thank you.

Phil Bak: Thank you very much.

Nate Geraci: That was Phil Bak, CEO of Exponential ETFs. Again, the ETF is the Brand Value ETF, ticker BVAL, and you can learn more about this ETF by visiting