Investing legend Warren Buffett believes investors should put their faith in companies with 'wide moats.’ These moats, as he describes them, are sustainable competitive advantages. For Buffett, they are "superiorities they possess that make life difficult for their competitors."
Buffett notes:
"A truly great business must have an enduring 'moat’ that protects excellent returns on invested capital.... [A] formidable barrier, such as a company’s being the low-cost producer (GEICO, Costco (NASDAQ:COST) or possessing a powerful worldwide brand (Coca-Cola (NYSE:KO), Gillette, American Express (NYSE:AXP), is essential for sustained success."
Morningstar (NASDAQ:MORN) has identified five sources for finding economic moats or competitive advantages. They include:
1. Network Effect: The value of a company's product or service offering grows as its user base expands. Examples would include eBay (NASDAQ:EBAY) or Facebook (NASDAQ:FB).
2. Switching Costs: Customers would find it costly to move their patronage to another competitor. These costs are not necessarily only monetary. They could also involve training time and effort to learn the mechanics of competing products. Examples include software companies, like Salesforce (NYSE:CRM).
3. Intangible Assets: They include brands, patents, intellectual property rights or licenses that typically enable a business to charge premium prices for their offerings. When a company has intangible assets, competitors find it difficult to duplicate products. They could also prevent competitors from duplicating products. For example, for biopharma companies like AbbVie (NYSE:ABBV) or Merck (NYSE:PFE), patents are essential sources of competitive advantage.
4. Efficient Scale: This competitive advantage applies to a small number of companies operating in a limited size market. Examples would include airport operators, utilities or public railroads. Union Pacific (NYSE:UNP) and Dominion Energy (NYSE:D) would be two examples.
5. Cost Advantage: Some businesses can produce comparable products or services at lower costs than their competitors. As a result, they are able to undercut competition. Alternatively, they can sell their product or service at the same price as other businesses in the industry, obtaining higher margins and profits. For instance, Buffett emphasizes that his auto insurance group Geico, owned by Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb), has been successful due to its low-cost structure.
With that information, here’s our ETF for today.
VanEck Vectors Morningstar Wide Moat
Current Price: $70.77
52-Week Range: $44.73 - $70.77
Dividend Yield: 2.30%
Expense Ratio: 0.47% per year
The VanEck Vectors Morningstar Wide Moat ETF (NYSE:MOAT) invests in U.S.-based companies with wide moats that also offer good value. The benchmark index is the Morningstar Wide Moat Focus. In determining intrinsic value, Morningstar takes into account the predictability of a company’s future cash flows.
MOAT, which has 49 holdings, started trading in April 2012. The top 10 stocks comprise about 27% of net assets of $5.3 billion. In terms of sectoral allocation, information technology (IT) tops the list with 19.0%. Next in line are financials (18.6%), health care (17.9%), industrials (11.9%), consumer staples (10.2%) and consumer discretionaries (7.0%).
Among the leading names in the roster are Wells Fargo (NYSE:WFC), Intel (NASDAQ:INTC), Google's Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), General Dynamics (NYSE:GD) and Cheniere Energy (NYSE:LNG).
Year-to-date (YTD), the ETF is up more than 13% and hit a record high in April. Many of the names in MOAT will soon report earnings. Therefore, volatility and short-term profit-taking are possible. Interested investors could regard a potential drop toward the $67 level or even below as opportunity to buy the fund. We expect these names to continue creating shareholder value in future quarters, too.
Bottom Line
Many investors allocate part of their portfolios to businesses that have established economic moats. Having such a competitive advantage typically translates into superior business performance as well as robust shareholder value.
Those investors who also want to focus on global businesses with economic moats might be interested to know that VanEck offers two other thematic funds. They are: