The VanEck Vectors Morningstar US Wide Moat UCITS ETF (LON: MOAT) has returned 31.3% over a one-year period ended 31 January 2017, outperforming the S&P 500 Index’s 20.0% return over the same time frame.
The VanEck Vectors Morningstar US Wide Moat UCITS ETF tracks the performance of the most attractively priced companies deemed to have ‘economic moats’ -sustainable competitive business advantages.
The fund’s strategy is based upon a proprietary model designed by Morningstar that selects firms considered to possess ‘wide moats’ – a significant structural competitive advantage that has the potential to provide long-term above-average returns. The term ‘economic moat’ was coined by Warren Buffett and can refer to brand loyalty, cost advantages, economies of scale, or regulatory protection, among others, as potential avenues whereby firms establish a strong market position.
The Morningstar Wide Moat methodology focuses on five key sources of competitive advantage. These include network effects, the increase to customer value as more customers use the service (eBay being a good example); intangible assets, including brand loyalty, patents, and regulatory licenses; cost advantages, allowing firms to undercut potential rivals; switching costs, the expense of money or time borne by customers who wish to switch providers; and efficient scale, whereby natural positioning or sunken infrastructure costs deter new firms from entering the market.
Brandon Rakszawski, Product Manager at VanEck, said: “Morningstar’s thorough economic moat research, which seeks to identify quality companies with sustainable competitive advantages, paired with their valuation framework form the foundation of the index. The result is dynamic, high conviction exposure well suited for long-term U.S. equity investors.”
Commenting on the fund’s outperformance, Rakszawski told ETF Strategy: “MOAT’s index was driven by quality companies that were trading at attractive valuations throughout the year. Strong performers from the information technology, consumer discretionary, and industrials sectors provided a boost and several high profile acquisitions also contributed to the index’ performance.”
The Morningstar Wide Moat Focus Index contains at least 40 attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team, and assigns an equal weighting to each. The index is divided into two equally-weighted sub-portfolios, and each is reconstituted and rebalanced semi-annually on alternating quarters.
According to recent Morningstar data, as of 31 January 2017, the US-listed version of MOAT had a total return in the top percentile for the US large blend category for the past 12 months (out of a universe of 1,415 US-registered/domiciled funds), in the top quartile for the three-year period (a universe of 1,256 funds), and in the fifth percentile since inception on 24 April 2012 (1,290 funds). The results lend strong support to the theories underpinning the ETF’s selection strategy.
The underlying index currently has 50 constituents and is exposed to the health care (29.8%), consumer discretionary (21.6%), industrials (13.4%), financials (11.6%) and information technology (10.1%) sectors. Current well-known names in its constituent make-up include Twenty-First Century Fox, Walt Disney, American Express, Amazon, Berkshire Hathaway, Biogen, Wells Fargo, Starbucks, Microsoft, and Harley-Davidson.
The ETF has a total expense ratio of 0.49%.