“The point of the portfolio is to provide broad U.S. exposure, mainly in the large-cap market, but in a diversified way across the sectors,” Quigg explains. “In some sectors, you’ll have smaller companies with greater market share—Vonage is a good example—where relative to their industry competitors they have a promising score. Because of that, it [Vonage] has an overweight and that’s reflected in the top 10 ranking.”
Gimmicky?
The American Customer Satisfaction Core Alpha ETF is the latest in a slew of seemingly niche products on the market that are either hyper-focused on a particular industry or distinctively structured to stand out from the crowd. Naysayers view these products as gimmicky, and a number of these funds have struggled to attract assets.
But Quigg, a 20-year ETF industry veteran who previously headed State Street Global Advisors SPDR ETF’s global sales strategy, global capital markets and institutional ETF sales groups, naturally believes the ACSI fund employs a premise and methodology that can lead to consistent and substantive market returns.
“Customer satisfaction is a precursor on how well a company can do,” he explains. “The buyers [of a company’s products] are consistently under heard in the investment marketplace, and we think we have a means to continually integrate new information into a model that will lead to consistent outperformance.”
Hedge Fund
The American Customer Satisfaction Index came about in 1994 from a collaboration between Fornell and other University of Michigan researchers, the American Society for Quality in Milwaukee, and CFI Group in Ann Arbor, Mich. It was used by some central governments to forecast economic figures and in academic research, among other purposes.
But when Fortune 500 companies approached Fornell to better understand what he was doing, Quigg explains, it got Fornell thinking about translating his index into financial purposes. Fornell founded ACSI Funds, and in 2000 the company created the CSat Classic-Long/Short Hedge Fund, which invests in U.S.-listed large-cap equities as measured by the American Customer Satisfaction Index.
Because this is a traditional long/short hedge fund with no constraints, it’s not a proper comparison tool for investors seeking to divine how the newly launched ETF could perform.
“They’re different vehicles meant for different parts of your portfolio. The engine embedded in both of them is the same, but the purposes of the vehicles are different so that the experiences will be different,” says Quigg, who adds that from a macro standpoint most of the hedge fund’s outperformance comes from its long positions.
The hedge fund is meant for the alternative sleeve in investor portfolios, Quigg says, whereas the ETF, while it uses the same customer satisfaction data used by the hedge fund, is intended to be a core U.S. equities holding.
“We put a rules-based methodology behind the ETF,” he says. “There are no rules in a hedge fund. We made sure the ETF is diversified with a 10 percent band around the S&P U.S. sectors.”
The ACSI ETF has a net expense ratio of 0.68 percent. That seems in line with other smart beta-type index-based strategies, but investors can get less expensive core U.S. equities exposure by investing in a pure market cap-weighted passive ETF.
“We think that is a choice, but we think the growth of smart-beta is a sign that people are growing disillusioned with traditional cap-weighted management,” Quigg says. “We think this is an alternative, and it’s a way to get the same beta exposure but with an opportunity to outperform. Whether you look at traditional cap-weighted funds or our fund, at the end of the day if you’re getting the same level of volatility and risk but one gives you the outperformance that more than covers it expense, we think it’s a good proposition.”
In the end, investors will express their level of customer satisfaction by either investing—or not investing—in this ETF.