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.
ETF Competitors
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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AMAZON.COM INC (
AMZN
): Free Stock Analysis Report
NORTHERN TRUST (
NTRS
): Free Stock Analysis Report
PFIZER INC (
PFE
): Free Stock Analysis Report
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