NEW YORK (TheStreet) -- Morningstar is a well-known company that rates mutual funds, but you've probably never heard of an exchange-traded fund it has created.
The Market Vectors Wide Moat ETF (MOAT) has amassed an impressive return and impressive asset level at $600 million. Moat as an investment concept is generally attributed to Warren Buffett and refers to a company with a unique competitive advantage.
Morningstar has taken the concept and built it into an index tracked by the MOAT ETF. As Morningstar sees it, companies with wide moats are more valuable, have more durable excess returns on capital, are more resilient and often have shares prices that are underappreciated, which creates investment opportunity.
The index underlying the funds is constructed by equal weighting the 20 stocks that fare well in a valuation screening and also have a high wide moat rating from Morningstar's analyst team. The index is rebalanced quarterly.Although the fund skews large cap with an average market cap of $71 billion, it is not a closet index product. Closet index is a derisive term that refers to an actively managed or rules-based fund that really is just an expensive index fund. MOAT has a 25% allocation to technology, compared with 18% for the SPDR S&P 500 (SPY). MOAT's second largest sector weighting is health care at 21%, followed by energy at 15%; both weightings differ significantly from SPY. MOAT has only a 5% weighting in the financial sector, compared with 16% for SPY. MOAT has been trading since only mid-2012, and so it has paid only one full-year dividend, which for 2013 was 23 cents a share. That puts the trailing yield just under 1%. It charges a 0.49% expense ratio. One holding is Berkshire Hathaway (BRK.B), the conglomerate run by Buffett, and other holdings include Intuitive Surgical (ISRG), eBay (EBAY) and McDonald's (MCD). MOAT is up 38% since its inception, compared with 32% for SPY. So far this year, it dropped 0.21%. MOAT could be a core domestic equity holding, similar to SPY or other large-cap index fund. Its track record merits that consideration. At the time of publication, the author held no positions in any of the funds or stocks mentioned. Follow@randomroger This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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