Instead of repositioning an investment portfolio and potentially lose out in the reshuffle, investors should consider a smart beta exchange traded fund strategy that aims to capture market upside while protecting against the downside.
For instance, the American Customer Satisfaction Core Alpha ETF (BATS:ACSI), a first-of-its-kind product that utilizes a proprietary methodology to invest in stocks based on the individual companies’ customer satisfaction scores, incorporates an academically proven leading indicator of stock prices to potentially help investors potentially outperform the broader market.
“At its core, customer satisfaction is a proxy for utility,” Josh Blechman, Director of Operations at ACSI Funds, said on Seeking Alpha. “As classical economic theory dictates, buyers use discretionary income (and debt) to maximize their utility (or satisfaction). Therefore, one would expect strong customer satisfaction companies to have better revenue growth relative to competition. Also, to the extent that satisfied customers, as repeat purchasers, are less costly compared to generating new customers, profits should be higher as well.”
Investors may think of customer satisfaction as an intangible asset that helps companies translate to improved revenue and earnings surprises.
“That is, relative to their competition, strong customer satisfaction companies are more likely to have positive revenue and earnings surprises,” Blechman said.
Compared to the broader market cap weighted portfolio, like the S&P 500, strong customer satisfaction companies have exhibited a higher frequency of positive revenue and earnings surprises. Additionally, they have consistently outperformed the market cap-weighted S&P 500, notably in down markets, over the past 12 year period.
Over the past 12 years, the strongest satisfaction companies had positive revenue surprises 5.5% more often than the S&P 500, along with positive EPS surprises 7.8% more often than the index.
Related: 3 Strategic Reasons Advisors Should Adopt Factor-Based ETFs
Strong customer satisfaction has helped generate outperformance on the upside through greater earnings surprises, and the factor has also helped cushion price declines during broad selloffs.
“Satisfied customers tend to be loyal customers that are also less sensitive to price increases,” Blechman added. “These customers are the last to leave in economic downturns and the first to return when things improve.”
Over the past 12 years, the ACSI underlying index underperformed the S&P 500 by more than 5% only five separate periods with an average peak-to-trough duration of about six months and the largest relative to market underperformance during any drawdown was 5.8%. The recovery and return to a relative all-time high in these instances occurred within five month on average as well.
For more information on factor-based strategies, visit our smart beta category.