Some investment strategies are obtuse and wonky. Others are simple and intuitive. The M.O. behind the American Customer Satisfaction Core Alpha ETF (ACSI), which launched on Tuesday, fits the latter category—at least on the surface.

ACSI is the first exchange-traded fund from asset manager ACSI Funds, which specializes in investment products based on the American Customer Satisfaction Index created at the University of Michigan.

“The premise is that a company whose customers are pleased with its goods and services is likely to outperform companies whose customers are less satisfied,” says Kevin Quigg, chief strategist at ACSI Funds, adding that quantifying that qualitative premise is easier said than done. “That’s where the math and science comes in.”

As Quigg explains, it's a twofold process of gathering information through surveys that produce more than 100,000 pieces of input from different customers regarding the goods and services they receive, and then pairing that with a proprietary econometric model developed by Claes Fornell, a professor at the University of Michigan’s Ross School of Business who’s considered an expert on marketing science and on the relationship between customer satisfaction and the performance of securities. The model interprets customer information and compares companies both in the same industry and across different industries.

According to the ACSI fund’s prospectus, a company’s ACSI Score is calculated based on questions that measure customer expectations, perceived quality, perceived value, customer complaints and customer loyalty.

“We like to think it’s an intuitive and straightforward process that’s differentiated from some of the traditional smart-beta products,” says Quigg, who says his company considers the ACSI fund to be an enhanced-beta product. “It’s a different way to gain outperformance from the market versus sort of mining the same quarry—for lack of a better term—where a lot of the smart-beta providers are.”

Specifically, the ETF’s underlying index incorporates customer satisfaction metrics for more than 350 brands representing more than 150 mainly large-cap companies. Sector constraints are applied at each quarterly index rebalancing to ensure a diversified portfolio across all U.S. sectors. Individual stocks are weighted within each sector by their relative customer satisfaction scores, and at rebalancing the max weighting for a holding is 5 percent.

The ACSI fund’s top 10 holdings comprise familiar names including Apple, Johnson & Johnson, Alphabet and Microsoft. But that group also includes small-cap Vonage Holdings, formerly a consumer-focused Voice over Internet Protocol company that ran quirky television ads but whose stock price was pummeled during the latter part of the prior decade. It has since transformed itself into a provider of cloud communications services for consumers and businesses, and evidently it scores high in customer satisfaction rankings.

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