By Stoyan Bojinov
Industry veteran Van Eck has added the Market Vectors Morningstar Wide Moat Research ETF (MOAT) to its global lineup of over 50 offerings. The new Van Eck ETF, which began trading in late April on the NYSE Arca, is based on the concept of "wide moats" popularized by Wall Street legend Warren Buffett. This economic terms refers to a business' ability to maintain a competitive advantage over the long-haul.
The concept of a wide moat is geared towards long-term, buy-and-hold investors who look to identify companies with sustainable advantages over their competitors. Wide moat simply refers to identifying companies with more significant advantages, thus, the wider the moat, the more favorably a business is positioned to thrive over the long term [see also Channeling Your Inner Buffett With ETFs].
MOAT charges 0.49% in expense fees and is linked to the Morningstar Wide Moat Focus Index, which is equal weighted and offers exposure to a basket of 20 companies deemed to have sustainable competitive advantages over the long-haul. According to Morningstar, there are several potential sources of wide moats. These include high switching costs for moving to a competitor, cost advantages over competing firms, superior intangible assets, and the so-called "network effect" when a firm's services become more valuable as the customer base grows.
Among the 20 components of the underlying index are Amazon, CME Group, Cisco Systems, Google, Pfizer, General Electric, Oracle, and Schlumberger. The index to which MOAT is linked has its largest sector allocations to technology (25%), financial services (20%), health care (15%), and materials (15%).
Relative to the S&P 500, the "moat index" is overweight in technology, financials, health care, materials, and utilities. The index is significantly underweight in consumer staples and telecom (neither receives any allocation), as well as industrials, energy, and consumer discretionary.
Meet The Competition: WMW
Utilizing a "wide moat" investment approach is nothing new in the exchange-traded product universe. The Morningstar Wide Moat Focus ETN (WMW), part of the ELEMENTS family of exchange-traded notes issued by Merrill Lynch, offers virtually identical exposure as MOAT, differing only by the product wrapper and fee structure. Its expense ratio is 0.75% basis points, or 29 basis points more than MOAT.
WMW allows investors to tap into the "wide moat" strategy while avoiding tracking error. On the other hand, the inherent nature of ETNs means that investors have to deal with the credit risk from the issuing institution. It's also worth noting that WMW has faced limited success in terms of attracting assets--it has accumulated under $7 million in assets since launching in late 2007.
Stoyan Bojinov is a writer at ETFdb. ETFdb offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com. Disclosure: No positions at time of writing.