The MOAT ETF Could Float Your Boat If You Desire Good Relative Performance

If you are a subscriber to this site, you likely are aware that this past weekend saw one of the investment world's most storied events as the faithful made their annual pilgrimage to Omaha, Nebraska, to learn what they could from the Oracle of Omaha himself, Warren Buffett. While the hot topics vary year to year, the one baseline constant in Buffett's investment approach is the idea of investing in businesses with well-established moats. Moats can take many forms, such as high capital cost barriers to entry, unique intellectual property rights, a unique product or service, a long-established business or any combination of these traits. To commemorate the 2022 meeting as well as to take a look at a real-life application of this basic strategy outside of Berkshire Hathaway , I'm going to take a look at a $6.8 billion fund that just celebrated its 10-year anniversary. The VanEck Morningstar Wide Moat ETF was launched April 25, 2012, and sports a 46-basis-point expense ratio, meaning that a shareholder with $1,000 invested over a calendar year would pay $4.60 in fees over that period. The fund is passive and tracks the Morningstar Wide Moat Index. While the fund has been around for a decade, the index went live five years prior on Feb. 14, 2007, per the index methodology. As not to bury the lede, the chart below shows that over the past decade to April 29, 2022, both BRK.A and MOAT have outperformed the SPDR S&P 500 ETF , with those investments returning 14.97%, 12.95% and 11.44% on an annualized basis, respectively. This same first, second and third pattern plays out over the trailing five-year and three-year periods as well. BRK.A achieved its 10-year record with slightly higher annualized volatility at 21.43%,with MOAT coming in at 20.52% and SPY at 19.93% by my calculations. It should be noted that BRK.A is able to hold certain assets and have certain concentrations that MOAT cannot due to rules around diversification and derivatives use that govern the operation of ETFs. This helps explain the relative outperformance of BRK.A over both MOAT and SPY. Speaking of the methodology, let's see how the folks at Morningstar go about selecting names for this index. The starting universe is the Morningstar US Market Index, which looks to capture 97% of the market capitalization of the U.S. market excluding master limited partnerships (MLPs), business development companies (BDCs), exchange traded funds and other pooled investment vehicles, preferred shares, convertible notes and in some cases American Depository Receipts (ADRs). Analysts then develop an Economic Moat Rating for each name in the universe. Morningstar defines a moat as a structural feature that allows a firm to sustain excess profits over a long period of time. Specifically, it focuses on return on invested capital (ROICS) above analysts' internally generated weighted average cost of capital (WACC). Companies classified as Wide Moat are companies that Morningstar analysts believe will be able to produce a return on invested capital above the weighted average cost of capital for what they describe as more likely than not... for at least 20 years. Recent performance attribution Regular readers will know that I occasionally perform return attribution on funds by taking current holdings and backing into position weights at the beginning of the observation period. In this case, I was able to get an estimate of weights at the end of February 2022 that let me calculate the fund's return from Feb. 28, 2022, through April 29, 2022, to within 0.01%. Of the fund's 52 holdings, 16 have had positive returns over this period. Consumer staples and healthcare names have led the way with names such as Merck & Co. , Constellation Brands , Kellogg Company , Campbell Soup , Coca-Cola and, at No. 15, Berkshire Hathaway . Names that have dragged over the past few months include Walt Disney Company , Amazon.com , Etsy and Boeing . By my calculations, the bottom 10 performing names have contributed to roughly 80% of the period's 6.10% drawdown. This is a relative 0.45% loss compared to SPY over the period, but from the figures I have seen represents a somewhat rare period of underperformance. Going forward As we sit at the beginning of this rate hike cycle, it is clear (to me at least) that we are in the early innings of a market regime change shifting away from momentum, bluster and hopium toward good, old-fashioned fundamentals, such as earnings and free cash flow. As we navigate this market finding a new floor, I don't see how stepping into a healthy position in MOAT over the next three to six months would be a bad thing as we move through this cycle.

The MOAT ETF Could Float Your Boat If You Desire Good Relative Performance

The VanEck Morningstar Wide Moat ETF has held its own against the SPDR S&P 500 ETF and diversified giant Berkshire Hathaway.

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