Van Eck Global, the New York-based fund provider behind the Market Vectors ETFs, today rolled out an ETF that’s built around Warren Buffett’s “moat” concept of investing in undervalued companies that show sustainable competitive advantages over their counterparts.
The fund will track the rules-based, equal-weighted Morningstar Wide Moat Focus Index, which canvasses some 97 percent of the U.S. market capitalization to find the top 20 companies that show the best price-to-fair value ratios.
MOAT has an annual expense ratio of 0.49 percent a year.
Market Vectors is the first to put Warren Buffett’s “moat” concept into an ETF wrapper, but the fund is akin to the Elements Wide Moat Focus ETN (WMW - News) that was launched back in 2007. The $14 million ETN is also tied to Morningstar’s research expertise and costs 0.75 percent.
So-called moats are determined by a company’s intangible assets—such as brand name and patents—as well as by its cost advantages, economies of scale, switching costs and network effect.
In order to get a “wide moat” rating, a company must generate returns on new invested capital that exceed their cost of capital for at least 20 years, according to information on Morningstar’s website.
Indeed, only about 10 percent of the entire equity universe Morningstar tracks gets a “wide moat” tag, but the small segment has performed well relative to the broad stock market.
In the last decade, the Morningstar wide moat index has seen an annualized total return of 15.3 percent, compared with 8.1 percent for the S'P 500, according to Market Vectors data. Year-to-date in 2011, the index is up 16.0 percent compared with the S'P 500’s 12.6 percent increase in the same time frame.
The fund MOAT’s portfolio is heavily tilted toward large-cap names, with companies like Amazon, CME Group, Cisco Systems, Northern Trust and Google topping its list of holdings.
From a sector allocation perspective, information technology is the fund’s biggest exposure at 25 percent.
Roughly 20 percent of MOAT is tied to financial services, and another 30 percent is split between health care and materials. The fund is rebalanced quarterly.
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