Van Eck Global, the investment management firm behind the Market Vectors brand of ETFs, has announced the launch of the Market Vectors Morningstar International Moat ETF (MOTI), building upon the success of the US-centric Market Vectors Morningstar Moat ETF (MOAT) which has accumulated over $890m in assets under management (AUM) since its launch in 2012.
Market Vector’s latest “moat” ETF targets international firms with sustainable competitive advantages.
The term ‘economic moat’ was coined by Warren Buffett and refers to the ability of a firm to maintain significant market share and protect their long-term profits. This could be through brand loyalty, cost advantages, economies of scale, or regulatory protection, for example.
In economic theory, the competitive advantages attributable to moats are generally eroded over time. A firm with a competitive advantage often earns significant profits, encouraging new firms to enter the market and reducing the firm’s dominant position.
To combat this, the Morningstar indices underlying these funds evaluate the competitive advantages of firms within the index universe over time. The index is then rebalanced quarterly, eliminating firms whose dominant position is deteriorating, thereby maintaining the advantageous qualities offered by economic moat firms.
Due to the success of MOAT, both in terms of performance (the fund has an average annualized return of 15.1% since inception) and investor demand (strong AUM growth), investors will likely respond positively to the expansion of theme into international securities.
“MOAT resonated with investors and with much of the world’s investable opportunities outside the United States; we’re launching MOTI as a means to capture moat-based opportunities abroad,” said Brandon Rakszawski, product manager at Van Eck Global.
MOTI is currently composed of 50 securities, with major country exposures to Australia (21.7%), Canada (15.1%) and India (13.0%). The main sector exposures are in financials (48.8%), materials (11.8%) and consumer discretionary (8.5%). Roughly 70% of the value of the fund is invested in large-cap firms, with the rest in small and mid-cap securities. The largest constituents within the fund currently include Sun Pharmaceuticals (2.4%), Ambuja Cements (2.3%) and Wharf Holdings (2.3%), all of which have discernible economic moats.
Sun Pharmaceuticals is a Mumbai-based pharmaceutical company that specializes in the development of complex drugs. The firm maintains a competitive advantage through extensive brand recognition in emerging markets as well as a low-cost business model achieved through strategic vertical integration.
Ambuja Cements established itself as a provider of premium quality cement in India through a strong dealer network, and initiated a system of ongoing technical support to customers, a first for the industry in the country. Although this practice is now the norm it has led to strong brand recognition and customer trust, enabling the firm to charge a 2-3% premium on their product.
Wharf holdings, a leading commercial landlord in Hong Kong, has built up a portfolio of high quality property assets over the years. Its flagship retail assets, Harbour City and Times Square, are some of the most productive retail malls in the world. Together they account for 9% of the city’s retail sales.
MOAT and MOTI have total expense ratios of 0.49% and 0.56% respectively. Both funds trade on the NYSE Arca in USD.