The torrid pace of ETF development continued this week as New York-based issuer Van Eck debuted another product under its Market Vectors brand name, the Market Vectors Morningstar Wide Moat Research ETF (MOAT). The new fund looks to focus on the U.S. markets but with a twist; honing in on stocks that have wide competitive moats, otherwise known as viable advantages that are hard for competitors to overcome.
In other words, the new ETF will offer investors exposure to the Morningstar Wide Moat Focus Index which looks to provide equal-weighted exposure to 20 attractively prices companies that have sustainable competitive advantages. Generally speaking, these competitive advantages can be lumped into one of the following groups; brand power, high switching costs, network effects, cost advantages, or efficient scale (read Three Great ETFs For Your IRA).
According to Morningstar research, if investors take the 20 cheapest wide-moat stocks over the trailing three and five year periods, as well as since the strategy’s inception in late 2002, you would have easily beaten the S&P 500. The wide moat technique would have beaten the S&P 500 by at least 5% for any of the time periods listed above while the system would have outperformed 95% of large-cap funds since the start of the strategy in 2002.
MOAT ETF In Focus
The ETF looks to apply this strategy by allocating heavily to the technology and financial services sector, followed by health care and materials. Interestingly, telecommunications services and consumer staples account for 0% of the fund while consumer discretionary companies only make up 4.6%. This suggests that the product may not be the most balanced from a sector perspective and can be prone to heavy weights in certain industries.
From an individual security perspective, some of the top ‘wide moat’ companies include Northern Trust (NTRS), Pfizer (PFE), and Amazon.com (AMZN). In total, large caps account for about 85% of assets while mid caps comprise the rest of the fund at roughly 15% (see Three ETFs With Incredible Diversification).
While the strategy appears to have performed well from a backtesting standpoint, investors should note that the product has relatively high fees when compared to other large cap focused ETFs. The net expense ratio is capped at 49 basis points a year, a level that is nearly seven times the cost of the cheapest ETFs in the space.
In terms of ETF competition in the large cap world, investors have a plethora of choices. Currently, there are 41 other products that use an ‘enhanced’ index to target the large cap space. To this end, there aren’t any ETFs that target the exact same index, although several others do look to focus on high quality companies (see Three Unlucky Equity ETFs).
Among the most popular in this respect is the PowerShares FTSE RAFI US 1000 ETF (PRF) which has over $1.3 billion in AUM. The fund utilities the RAFI methodology in order to weight securities, breaking the link between price and allocation that dominates cap weighted funds. This ETF charges investors 39 basis points a year in fees and sees good volume of nearly 100,000 shares a day.
Beyond this, investors should also be aware of the ELEMENTS Morningstar Wide Moat ETN (WMW). This note focuses on the Morningstar Wide Moat Focus Total Return Index, charging investors 75 basis points a year in fees. However, the product has failed to catch on with investors as AUM is still below $15 million despite having been on the market for over four years (read more on ETFs in the Zacks ETF Center).
Given this low level of interest, it will be interesting to see if MOAT can avoid the same fate as its ETN counterpart. Since the Market Vectors product is structured as an ETF and has lower fees, it looks to stand a good chance of gaining a reasonable asset base. This looks to be especially true if the index that MOAT is based on can continue to perform well and if the wide moat companies can continue to exploit their competitive advantages to higher stock prices in the years ahead.
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