BVAL: Capturing Brand Value in an ETF

Despite the recent hoopla surrounding all of the new ETFs coming to market focusing on various investment factors, the factors themselves have been around for decades. I myself have been a huge fan of the momentum factor since the mid-1980s, and the value factor is probably centuries old. Most of these new ETFs are not new investment approaches—they are the same old “standard” investment factors combined, sliced, diced, and repackaged as an ETF (with seemingly great backtested results). However, in one small corner of the ETF universe, there is some true innovation taking place—capturing intangible factors such as brand value. Yesterday’s introduction of the Brand Value ETF (BVAL) is just such a product.

BVAL Brand Value ETFWhen companies issue their quarterly and annual reports, the words, numbers, and insights can go on for pages and pages. The company will value its buildings, equipment, inventories, loans, and a host of other items, but nowhere will you find a line item entry that places a value on the company’s brand. Often the centerpiece of information in merger and acquisition transactions, brand value tends to be a missing ingredient in regular ongoing financial statements.

The primary reason companies do not report on this aspect of corporate value is because of the historically qualitative nature of intangible assets such as brand value and customer satisfaction. The Brand Value ETF (BVAL) solves this dilemma with a rules-based index built from quantifiable data. This new ETF, launched yesterday (June 13, 2017) by Exponential ETFs and Brandometry, seeks to outperform the market by investing in companies with strong brands that are not fully valued by the market.

The Importance of Brand
According to the Federal Reserve Bank, the U.S. economy holds more than $14 trillion in intangible assets, representing the majority of the entire economy. This translates into brand being the most valuable asset for many companies, even if it does not appear on the balance sheet. It also implies that brand is the most overlooked factor in traditional security analysis.

“We believe Intangible assets represent the next frontier in stock valuation. The Brand Value ETF captures and capitalizes on the work of Brandometry to quantify the brand value of publicly traded companies,” says Phil Bak, CEO of Exponential ETFs.

A company’s brand is continually relevant, is key to its marketing, and summarizes “what you know” about a company. For a company, brand can be a leading indicator of its current health and its future financial success. Despite its importance, GAAP accounting methods fail to capture this significant component of corporate value. “Brand” is a collection of perceptions about a company, its assets, its people, and its conduct.

Index Process
All good investment strategies require a security selection process, and for smart-beta ETFs, that process resides in the underlying index. The BrandTransact50 Index seeks to identify companies worthy of investment that share high growth potential and positive brand resonance. It uses a rules-based methodology to identify strong brands that maintain brand equity value not recognized in share price. The Index is composed of the 50 companies with the highest Brand Value scores (the ratio of their BrandPower score to market capitalization), equally weighted, and reconstituted annually. To be included in the Index, a company needs to be part of the Wilshire 5000 Index and have their brand scored by Tenet Partners, a leading brand innovation and marketing consulting firm.

Tenet Partners annually surveys approximately 10,000 individuals on the subject of company brands. Survey questions are designed to gather quantitative information on both brand familiarity and brand favorability. These results are objectively tabulated to determine the “BrandPower” score for each company. The Index then selects the 50 companies with the largest BrandPower-to-market-capitalization ratio—the 50 most undervalued companies based on Brand Value. Because of the nature of brands, the Index is expected to be primarily composed of large-capitalization companies and have a significant exposure to the Consumer Discretionary sector. Additional information is located in the BrandTransact50 Index Methodology document.

ETF Facts
A top-10 list of companies having the highest BrandPower-to-market capitalization ratios was not available at the time of this writing. However, all 50 of the top-scored companies included in the Index can be found in the list of BVAL’s holdings (downloadable here). As you would expect, all 50 names are recognizable, even to noninvestors.

The underlying index is equally weighted, therefore BVAL’s current top-10 holdings represent the securities that have performed the best since the last rebalancing (August 31, 2016). The firms are Best Buy (BBY), Bank of America (BAC), Wendy’s (WEN), Morgan Stanley (MS), Charles Schwab (SCHW), Tiffany & Co. (TIF), Marriott (MAR), Boeing (BA), and American Airlines (AAL). Current sector exposures include Consumer Discretionary 48%, Technology 18%, Financials 17%, Industrials 12%, and Consumer Staples 5%.

BVAL will be added to the U.S. Single-Factor Strategies (smart-beta) category of the ETF Field Guide. It has an expense ratio of 0.65%, and dividends will be paid annually. The fund’s investment advisor is ACSI Funds, the firm behind another intangible asset-factor ETF, the American Customer Satisfaction Core Alpha ETF (ACSI).

Additional information is located in the Fact Sheet, the BVAL prospectus, and the Brandometry website.

Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Weekly Edge: ETF Relative Strength Indicates Bulls Still in Charge

In recent weeks, leadership among ETF sectors suggests that market leadership is driven by a mix of influences. All of our Benchmark ETFs indicate less bullishness, which may be due to the typical summer doldrums in global investment markets. Bearish and lagging sectors are at the bottom of the momentum ranking because investors appear to be less bullish on them—not necessarily more bearish. In other words, at least domestically, investors appear modestly less enthusiastic about the leaders than the previous week, but they are not yet ready to move up the rankings those sectors and factors consider defensive.

Sectors: The leading Sector Benchmark ETFs exhibited some interesting shifts this past week. Ron pointed out the very wide spread between the top and the bottom of the sector rankings the week before. That was resolved this past week by a decrease in both Energy’s negative momentum and Technology’s positive momentum. The spread between the two declined from 68 momentum points the previous week to 40 this past week. Ron also commented on how long typically defensive sectors such as Utilities and Consumer Staples could coexist at the top of the leaderboard with the offensive sector Technology. That “stress” at the top of the ranking was partially resolved this week, as Consumer Staples slipped significantly in the rankings, making room for Health Care.

The Sector Benchmark ETF leaderboard is not highly “organized.” This means that among the leading sectors there is a mix of bullish economically sensitive sectors such as Technology, Materials, and Industrials. However, also near the top of the list are generally defensive sectors such as Utilities and Health Care. On the other hand, Energy, an economically sensitive sector, is at the bottom of the list with Consumer Discretionary, an offensive sector in the bottom half of the ranking.

This order of sector relative strength may be explained more by special situations than by economic or market expectations. Rising interest rates may be highlighting the yield of Utility stocks while taking the glow off Real Estate. Health Care may be benefiting from investor sentiment about pending health-care legislation, we know price wars are affecting telecom earnings, and an oil glut is holding down energy prices. That the leaders and laggards can be explained by reasons other than market or economic themes is a sign that investors have had little incentive to change their long-term expectations.

Factors: Momentum, Growth, and Small Cap are the top factors among our Factor Benchmark ETFs. This is a bullish alignment of factor rankings. This alignment of rank at the top of the list is reinforced by the factors at the bottom of the list, which are all classic defensive safe havens—Value, Fundamental, Yield, and High Beta. While the factor rankings are clearly bullish, they are a bit less enthusiastically so than the previous week: There are only two factors with momentum scores greater than 20 (compared to three the previous week), and the sum of the top three ranking scores is 77 (compared to 89 the previous week). On the other hand, the sum of the bottom three momentum scores increased from 6 to 30, so there was also a reduction in bearish posturing.

Global: There was little change in rank and overall momentum level among the Global Benchmark ETFs. The top-ranked regions continue to include China, Eurozone, and EAFE. This ranking continues to suggest that investors who long underweighted those regions are now directing new capital overseas to regions now believed to be economically and politically stable and growing. Conversely, global regions such as Latin America and UK are lagging possibly because of investor uncertainty about their political futures. This ranking may not indicate a belief that the leading regions will have the best economies going forward, but that those economies are not now in danger.

2 week EdgeChart 06/14/17

Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.”

—Jeff Bezos

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