Consumers buying into brands they love is becoming a more in-depth strategy, especially with the power of social media. How do you see the trend playing out and was this one of the catalysts for launching the Brand Value ETF (BVAL)?
We know that Brand Value has always represented a significant percentage of corporate value – especially for consumer Brands – yet this value sits entirely outside the balance sheet, and as a result, outside of traditional security valuation methods. So we are shaping a new approach to capture that unrealized value. Social media is connecting consumers to Brands in a deeper way than ever before, so the power of Brands is increasing dramatically, and advances in big data capabilities now allow us to quantify brand data to the point where we were able to produce the BrandTransact 50 Index, which the Brand Value ETF tracks.
We have seen some well-known brands get a bit stretched valuation-wise in recent years. How does your ETF look at valuations and decide how far to hold on to a brand name stock play that could be getting pricey as compared to its historical valuations?
The BrandTransact 50 Index does not simply track the top 50 Brands – it is designed to track the top 50 companies that have been identified as having unrealized Brand Value. By selecting companies whose stock price is depressed, yet have the anchor of the strong Brand, the index is not chasing high growth or overvalued stocks but rather taking a more disciplined approach in identifying strong Brands that have unrealized Brand value. The index actually looks to avoid fully valued companies.
Social data is a big part of numerous strategies to invest in brands. How does this belief come into play strategy-wise when it comes to monitoring what consumers are saying about their interaction with brands and their experiences, good and bad?
Consumers are more connected to their Brands than ever before, due in large part to social media. Transparency has driven greater access and understanding, but we have also seen brand building snafus that have turned consumers off altogether, like the recent backlash to a Pepsi commercial. Millennials are especially aware of the brands they associate with, and will not hesitate to hold them to account. When the data is sourced the respondents can comment on a broad array of topics including a Brand’s ethics, social responsibility, environmental standards, etc. These are factored into a favorability score, which is a component of the final PowerBrand score that we ultimately use.
Without giving away too much, do you see developing more ETFs focused around the consumer experience, but maybe beyond the consumer brand side and more along the lines of other services that maybe aren’t quite talked about on the social/brand side and are under-the-radar services?
We believe that quantifying intangible assets is the next frontier in security valuation. The American Customer Satisfaction Core Alpha ETF and the Brand Value ETF allow investors to tap into the customer experience to predict future stock performance, rather than investing based on factors derived from balance sheet data – data that may already be priced into the market and is certainly historical rather than predictive.
Exponential is in the early stages as a company and the investment industry is just beginning to understand the scope of data that is now available. Exponential and firms like Brandometry are on the forefront of bringing innovative products to our clients – and we will do so strategically and selectively.
Can you give us some insight on some of the ETF’s top holdings and what triggered their selection?
All of the holdings in BVAL start with a 2 percent weighting in the portfolio. Some of the current top holdings, like Best Buy, Wendy’s, Morgan Stanley, Charles Schwab, Tiffany and Marriott, have appreciated in share price since the rebalance on August 31st of last year.
The 50 companies in the portfolio are identified as having the most unrealized value, based on the BrandPower-to-market capitalization ratio. This process shows where a well-known Brand’s share price is not being recognized in the market.
What else in the lab currently and what should we expect from the Exponential ETF pipeline in the years ahead?
We have a world class product development and management team at Exponential plus capabilities across all asset classes. Our vision is to offer ETFs that utilize proprietary strategies and strategies developed through partnerships with other asset managers. Building on the foundations of ACSI and BVAL we plan to be diligent and selective regarding the products and partners we choose. Our goal is to list breakthrough products for our clients, which we believe solve un-met market needs and utilize best in class data and investment methodologies. We are excited to be paving the way in quantifying intangible assets and presenting new investment solutions.
Exponential ETFs offers exchange traded funds in partnership with select asset managers. These managers are chosen for their ability to utilize differentiated approaches to investing that seeks to provide superior results for investors. Backed by over 30 years of ETF industry expertise, Exponential ETFs are built and managed using the industry’s best practices, and are overseen by an experienced product management team and an industry leading capital markets infrastructure. Exponential ETFs is wholly owned by ACSI Funds.