Seeking Alpha

Capitalizing On Brand Rotation

by: Jane Edmondson

The quilt chart demonstrating the changing of the guards among asset classes over time should be a familiar staple to most financial advisors and investment professionals.

Brandometry just came out with a quilt chart that depicts a similar rotation among the undervalued strong brands tracked by its ETF index.

The list of top ten brand performers varies each year, arguing for owning a diversified basket of brand companies.

My new favorite brand is Lululemon (LULU). I am celebrating the fact that I am finally “fit” enough to “fit” into their yoga pants. Lululemon is a great example of an aspirational brand. People are willing to pay more to wear this upscale brand of clothing and, as a result, the company’s adjusted gross profit margins are a lofty 57.3% on $3.3 billion in annual revenue.

Brand value is an intangible asset that does not show up on the balance sheet, but it does translate into pricing power, profit margins, and strong sales. It is no wonder then, that owning a basket of the top 50 brands yields superior investment results, beating most major indices over the last 10-year time period.

Source: Brandometry, as of 3/31/19

Brand Selection

How does the Brand Value Index select the top 50 brands each year? Utilizing Tenet Partners’ proprietary Brand Power Score methodology, the Index is rules-based and equally weights the top 50 companies exhibiting both a discount of brand and intangible asset value to market capitalization and a positive return on invested capital (ROIC).

While brand leadership varies each year, the Index has consistently identified not only the best brands to own, but the best time to own them.

In its infographic, “A Decade of Capturing Brand Value,” you can visually see how brand leadership has rotated over the last 10 years.

Sources: Bloomberg, EQM Indexes LLC

Not investment advice or a recommendation to buy or sell securities. Investors may not invest directly in an index. Brand performance is for the time period held in the Index and not annual performance.

In 2018, some of the top contributors of performance to the Index were Netflix (NFLX) +85.42%, Mastercard (MA), +41.63%, Target (TGT), +39.49% and Keurig Dr Pepper (KDP), +36.21%.

Looking at this list, even the savviest investor might not have predicted those were the brands to own last year. There is a reversion to the mean aspect to the product’s methodology, which gravitates it toward brands that are beaten down in price, but are likely to rebound based on their underlying brand strength.

Tenet Partners, a recognized authority on brand measurement and valuation has been compiling quarterly brand value for companies since 1994. Its brand scores are based on survey data from C-Level executives that know the companies and their industries, achieving a brand value score that reflects its intangible attributes.

Brand Is An Intangible Asset

The latest estimate from consulting firm Ocean Tomo is that almost 85% of the S&P 500’s market value is made up of intangible assets such as intellectual property and brand. So capturing brand, provides a potentially huge alpha generation opportunity as demonstrated by the long-term outperformance of the Brand Value Index and the ETF that tracks it, the Brand Value ETF (NYSEARCA:BVAL).

The index is rebalanced annually in September and its 50 constituents are equally weighted to enhance diversification. Currently, as of 4/24/19, the top holding is Disney (DIS).

Disney is a great example of brand rotation! Last year was the year of Netflix. This year Disney just launched a streaming service which leverages its brand and its millions of loyal customers. A big part of Disney’s brand is its library of content, another intangible asset, led by brand franchises like “Star Wars” and Pixar.

Who will win the battle of the brands? Maybe Disney, maybe Netflix. Why not own them both?

Some of the other top brand names in the Index include:

  • Starbucks (SBUX)
  • Procter & Gamble (PG)
  • Intel (INTC)
  • Estee Lauder (EL)
  • McDonald’s (MCD)
  • Microsoft (MSFT)
  • Hilton Worldwide (HLT)
  • Hershey (HSY)
  • PepsiCo (PEP)

These are all great brands that most of us would be happy to own in a portfolio. As mentioned, the Index holds 50 of these similarly great brands.

Starbucks, currently the second largest holding in the index, is another great brand story. $4 for a cup of coffee! That’s pricing power and it generates gross margins of more than 58%.


Intangible brand value is often underappreciated and mispriced in the market. The Brand Value Index seeks to capitalize on this brand rotation to generate alpha relative to the market. It is not enough to own great brands, you must know when to own them. The list of top brands to own varies from year to year, which advocates for owning a basket of brand-driven companies as a satellite complement to your other asset exposure.

Disclosure: I am/we are long BVAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: EQM Indexes is the creator of the EQM Brand Value Index which has been licensed to Brandometry for the Exponential Brand Value ETF. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor, and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice.