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MOAT - A Low Cost 'Wonderful Business at Fair Price' ETF

March 04, 2014 | About:
Grahamites

Grahamites

134 followers

Warren Buffett (Trades, Portfolio) has repeatedly said that non-professional investors should use index funds instead of buying individual stocks. In fact, he specifically named Vanguard S&P 500 index fund due to the fund’s ultra-low expense ratio.

Admittedly, if one has invested in the Vanguard S&P 500 index fund over time (no market timing involved), one would have done very well in the long run. But what if you can invest in a low cost index fund that is very likely to beat the S&P 500 index with arguably low risks and higher quality companies? This idea may sound a tad provocative and too good to be true.

This fund is Market Vectors Wide Moat ETF (MOAT), which is based on the Morningstar Wide Moat Focus Index (MWMFTR). According to the index description, MWMFTR is a rules-based, equal-weighted index intended to offer exposure to the 20 most attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.

Note the bolded words. For a company to be included in the index, not only does it have to have a sustainable competitive advantage but also have to be attractively priced. Morningstar keeps track of a list of wide-moat lists and ranks the companies within the last according to the price to fair value. Therefore, while a company such as Procter and Gamble has one of the widest moats, it won’t be top ranked unless the price is attractive. Below are the latest holdings of MOAT. Readers may note that it is not exactly equally weighted. This is because as prices change every day, market value and hence percentage of net assets of each holding will change accordingly. A daily rebalancing will result in unnecessary large trading cost so the rebalance is done on a quarterly basis.

All Fund Holdings as of 03/03/2014

Number

Holding

Ticker

Shares

Market Value

% of net assets

1

Intuitive Surgical

ISRG US

79,041

$35,871,967.44

5.94%

2

Eli Lilly & Co

LLY US

579,799

$34,505,179.44

5.71%

3

Compass Minerals Internation

CMP US

394,529

$33,816,772.28

5.60%

4

Ebay Inc

EBAY US

564,109

$32,893,195.79

5.45%

5

Spectra Energy

SE US

874,687

$32,651,839.26

5.41%

6

Oracle Corp

ORCL US

838,494

$32,290,403.94

5.35%

7

Accenture Plc-Cl A

ACN US

389,491

$32,133,007.50

5.32%

8

Express Script

ESRX US

430,967

$32,089,802.82

5.31%

9

Exelon Corp

EXC US

1,034,572

$31,383,881.32

5.20%

10

Schlumberger Ltd

SLB US

336,409

$30,833,140.54

5.10%

11

IBM

IBM US

165,402

$30,627,536.12

5.07%

12

Baxter Intl Inc

BAX US

432,704

$29,808,978.56

4.93%

13

Berkshire Hathaway Inc-Cl B

BRK/B US

253,066

$29,370,839.96

4.86%

14

Western Union

WU US

1,747,788

$28,995,802.92

4.80%

15

McDonalds Corp

MCD US

304,200

$28,938,546.00

4.79%

16

Sysco Corp

SYY US

784,046

$28,225,656.00

4.67%

17

Kinder Morgan Inc

KMI US

889,452

$28,142,261.28

4.66%

18

Coca-Cola Co/The

KO US

722,109

$27,526,795.08

4.56%

19

C.H. Robinson Worldwide Inc

CHRW US

505,114

$26,139,649.50

4.33%

20

Weight Watchers

WTW US

897,440

$18,918,035.20

3.13%

21

Other/Cash

 

0

($1,070,111.72)

-0.18%

MOAT was launched in late 2012 and underperformed S&P by a very thin margin in 2013 (MOAT netted a 30.88% total return versus S&P’s 32.39%). One year is too short to make any definitive conclusion about future performance,s but it seemsthat for non-professional investors who adhere to Buffett’s “buying wonderful business at fair prices” advice, MOAT may deserve some allocation in the portfolio.


Rating: 4.7/5 (12 votes)

Voters:

Comments

AlbertaSunwapta
AlbertaSunwapta - 7 months ago

Thanks for posting. I've looked at it since inception, and had owned for a while the precursor WMW ETN, but never felt comfortable with ETNs and about a year or so ago sold out as I pared back on index postions for valuation reasons (an error in hindsight). :-)

As such, I'd love to see more discussion here on Morningstar's selection methodology.

A discussion of the Wealth Index ETF would be interesting too.

billbyte
Billbyte - 7 months ago

Also consider the new SYLD which uses stockholder return as a guide [dividends, share buybacks, debt paydowns]

docmitch
Docmitch premium member - 7 months ago

If MOAT is essentially the same as WMW,one can trace performance for quite a few years.That ETN(similar to an ETF)outperformed most funds by a hugh amount during the 2008 crash as well as during the strong bull market the following year!

quixote1
Quixote1 premium member - 7 months ago

huhh.huhhh......if the sage says S&P low cost.....he doen´t mean moats,spin-offs,buybacks...even no RSP.

They can underperform in down markets.

Mr. Buffett know a thing (or 2) about automatic trading etf´s.

Tannor
Tannor premium member - 7 months ago

Thanks for the article and evaluation,

When analyzing ETFs, mutual funds or another fund manager vehicle I find myself examining two very crucial ratios that were not included. I would be curious to compare the ratios to the funds performance.

The first being how much does the manager have invested in the fund relative to AUM as well as annual compensation. The second point being what is the turnover ratio of the entire portfolio annually. I have empirical evidence that leads me to believe the lower the first ratio and the higher the second, the larger the variance between benchmark returns and fund performance.

I agree with Quixote that Buffett recommends the Vanguard S&P500 Index for a reason, this reason being most funds do not outperform, nor do they have MER's under 0.5% -

I see a turnover ratio average of 23% with the 2013 turnover being 45%. Not bad relative to peers but horrible compared to the Vanguard 3.4%. The costs look to be only 0.5%, below average, but still higher than the Vanguard index.

I would be glad to hear your thoughts regarding the expense ratio, turnover ratio and fund manager personal concentration of assets in the fund, relative to performance and peers. I still think if you are not going to devote the time to select securities, your best bet is to index and enjoy your personal hobby.

Cheers.

Grahamites
Grahamites premium member - 7 months ago

Tannor, thanks for commenting and to be clear, I myself am not in either an index ETF or this specific MOAT ETF and I am not planning to in the future. This article is to provide an alternative for small investors who may be interested in a high quality selective ETF. And agree if one doens't want to devote the time to select securities, an index fund is a good choice. But investing is my profession so I spend all day reading and analyzing industries and individual stocks.

WIth regards to MOAT, I think the higher turnover than the Vanguard S&P etf is warranted. Of course you are gonna have a higher turnover if the fund is actively managed versus a passively managed fund. And a 23% turnover is not bad at all if you compare that to say the Yacktman fund, which turns over around 20% last year.

The expense ratio of 49bps is not bad at all comparing to the typical 100-200 bps of actively managed funds. Morningstar does a good job analyzing the moat and even the moat trend of the widemoat watch list and they are disciplined in the way that they only buy or increase a position whenever the price to fair value ratio becomes very favorable. So it is a combination of high quality and discipline, which is extremely rare. The only other one I can think of is the Yacktman Fund (Trades, Portfolio) but it's a mutual fund.

I also think while emperical evidence can serve as guidance, it is only a starting point and each situation is unique in a way. When you have ETFs and Mutual fund of so many categories, you simply can't compare a passive fund to active fund, or compare a high quality business fund to a mediocre quality business fund as the amount of time and effort needed to manage each fund is vastly different.

So to sum up, yes, it has a higher turnover and higher expense ratio than the Vanguard Fund but if you look at the historical performance of Morningstar's wide moat portfolio Hare and Tortoise portfolios, both of which bare resemblence to the MOAT ETF, you will find that both have outperformed the market.

Cheers.

AlbertaSunwapta
AlbertaSunwapta - 7 months ago

I see it as a diversification tool because my circle of competence doesn't include the whole market and I'm no Warren Buffett (Trades, Portfolio) capable of almost guaranteeing market outperformance. So I've always owned individual stocks, select mutual funds (Chow, Cundill etc. in Canada) plus index funds and ETFs (things like WMW, IOO, other global, high yield, etc). I tend to add to or pare back on the index ETFs when overall market ratios, anecdotal information, etc. makes me feel that "the market" may be cheap or overheated. Not day trading moves, maybe closer to decade trading moves. MOAT provides an interesting means to get a group of businesses that should limit the downside risk, though they may not all be value investments, as long as people are not talking the "nifty fifty" nonsense the odds are that their overall value may be fair to modestly priced. So you get good to great businesses at fair prices if Morningstar is doing their job.

BTW, per the list above, I'd first bought ISRG at $45 then in the crisis at about $90. Clear good values. I sold it a couple years ago because it seemed overvalued to me. I may have been right but the price continued to rise and rise, and Morningstar believes otherwise. That's another value of diversification which I've missed out on by selling the indexes.

Grahamites
Grahamites premium member - 7 months ago

Alberta: It certainly can serve as a diversification tool and a rather good one in my opinion. The businesses are of the highest quality so your margin of safety, from a don't lose money standpoint, is higher than if you buys a basket of net net stocks.

Grahamites
Grahamites premium member - 7 months ago

Btw, ISRG demonstrates the combination fo monopolistic power and compounding power. You've got a business that's dominating the Robotic Surgery world, the Da Vinci is a fantastic product. One thing you gotta be careful selling those high quality compounders is that you can't base off your valution on trailing or even next year earnings. Project out at least 5 years and see if it still looks cheap if the moat is intact. ISRG was expensive at 580 but it's different story when it's below 350.

Cheers

AlbertaSunwapta
AlbertaSunwapta - 7 months ago

Morningstarr doesn't shy away from the technologically driven moats like Buffett does. I think Buffett is right to avoid tech because in a downturn, such stocks can plumment just like ISRG and become seemingly "undervalued" but that apparent undervaluation can be a mirage (a "value trap") if new technology or competition arises during that recession and breaches the moat. So in my view, recessions are a huge threat to your technology shares. Buffett avoids that by avoiding the risk of technological threat and chosing copmpanies with a fairly predictable 20 year horizon. So during a boom, your technological moat businesses create great returns for you and probably put you in an absolute positive return position, but their short lifespans creates a huge downside risk during periods of market undervaluation which might be protracted enough to destroy that moat.

For instance, if the iPhone had arrived a year or two later, Blackberry would have provided a great and dramatic example of how a borad recession coinciding with a new technological competitior can create a value trap. (I hate that phrase - value traps are investor errors nothing more.) Nonetheless, as it was Blackberry still had a huge moat coming up to the 2008 crisis but by the time the crisis ended, technological obsolescene had destroyed its moat and probably put a lot of technologically orintated "value investors" in a hole.

Grahamites
Grahamites premium member - 7 months ago

Alberta: Yes, Morningstar doesn't shy away from technology. But they keep an eye on the moat trend closely. If Blackberry had a wide-moat rating, I'd be pretty sure that Morningstart would change the moat-rating to narrow or even none after the introduction of the iPhone.

I take a different perspective on value traps. I think you have to differentiate between errors arising from bad processes versus and the unluckly outcome from a sound process due to forces of alterntive history. Also whether something is a value trap or not depends on the price you pay. Again take Blackberry for example, some investors bought it at mid teens because it's cheap from a balance sheet perspective. This is deserved and clearly an error. But you also have someone like the Yacktman Fund (Trades, Portfolio) which accumulated a huge amoung of shares below $10 because they were also factoring in a few catalysts that will pop the shares higher while the balance sheet is a lesser concern. Those investors who bought BBRY based on a Graham approach clearly fell into a value trap but the Yacktman Funds did not.

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