There are a lot of reasons to invest in a company. One of the most basic? You like its products or services. Setting aside metrics of valuation, stock price movement or yield, companies that are well liked by their customers should see repeat business, and thus, thrive over the long term.
And that’s the thinking behind a new exchange-traded fund solely made up of the U.S. companies ranked the highest by consumers.
The American Customer Satisfaction Core Alpha ETF /zigman2/quotes/203737528/composite ACSI +0.15% , which launched last Tuesday, builds its portfolio on the American Customer Satisfaction Index. The index is based on tens of thousands of online polls to score companies based on metrics, such as customer loyalty, complaints and the quality of service.
“It is a pleasure to buy things from Amazon, and you can see that translate into corporate revenue,” said Phil Bak, chief executive officer of ACSI Funds, who said that historical data indicated that companies with high levels of customer satisfaction outperformed the broader market over the long term.
“I got screwed on a United /zigman2/quotes/205037281/composite UAL -1.02% flight once, so I’ll never fly United again. I got sick at a Taco Bell /zigman2/quotes/209029767/composite YUM +1.12% , so I’m not going back to Taco Bell. Everyone has experiences like that, where they go back to the companies they’ve had good experiences with,” Bak said. “All we’ve done is apply that thesis broadly and turn it into a leading indicator that covers the whole market.”
The fund weights holdings based on sector, but also on how the companies score relative to other names in their industry. Overall, the ETF tilts toward technology names because it’s the sector with the highest level of satisfaction. Apple Inc. /zigman2/quotes/202934861/composite AAPL +1.45% is the fund’s largest holding, at about 3.36% of the portfolio, followed by Johnson & Johnson /zigman2/quotes/201724570/composite JNJ -0.13% , Google parent company Alphabet Inc. /zigman2/quotes/202490156/composite GOOGL +0.36% and HP Inc. /zigman2/quotes/203461582/composite HPQ +0.85% . Vonage Holdings Corp. /zigman2/quotes/209119823/composite VG -5.79% , T-Mobile US Inc. /zigman2/quotes/204659678/composite TMUS +0.61% and BB&T Corp. are also among the top 10 holdings.
Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.67% may be informally considered a “tech” company, too, but it’s officially categorized as a consumer discretionary stock — an industry with lower overall customer satisfaction scores based on the index. That means even if Amazon ranks high with its customer satisfaction, it’s a relatively small holding in the fund, with a weight of 0.44%.
Bak cited department store Macy’s Inc. /zigman2/quotes/201854387/composite M +1.37% as an example of customer satisfaction leading market performance. The company’s score, according to data from the American Customer Satisfaction Index, fell from 79 in 2014 to 73 in 2015, the most recent period for which data is available. That 7.6% drop in score was the worst year-over-year performance of any department store or discount retailer, and it preceded the company’s recent troubles. In August, Macy’s announced that it would be shuttering 100 stores, the latest in a series of store closures announced in response to falling sales. The stock is down nearly 25% over the past 12 months.
Because the fund launched less than a week ago, it’s too early to gauge whether investors are taking to it, or to measure how effective the ETF’s strategy will be over the long term. All top 10 holdings are positive for the year, however, with three gaining more than 20% in 2016 and all but three outpacing the 2% rise of the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.47% .
Since its debut, the fund is down 1.7%. The S&P is down 1.9% over the same period.