Exchange-traded-funds or ETFs are a great way to get instant diversification in one share. Depending on the ETF in question, the companies that you may be exposed to can be dozens, hundreds or even thousands in the case of the Vanguard MSCI Index International Shares ETF (ASX: VGS).
But if you own thousands of companies in one share, you are guaranteeing yourself a vanilla performance, as the chances of any outperforming stocks having any meaningful impact on your holdings are almost zero.
The VanEck Vectors Morningstar Wide Moat (ASX: MOAT) ETF strikes the right balance in my opinion. This ETF is based on the Morningstar Wide Moat index, in which Morningstar’s equity research team actively selects US stocks which are attractively priced and offer a sustainable competitive advantage. The key here is ‘sustainable competitive advantage’ or moat, which is exactly what Warren Buffett looks for in a company. This ensures that a significant proportion of MOAT’s holdings are quality businesses that are likely to outperform the market over the business cycle.
It currently holds 46 stocks, which is a Goldilocks-number of holdings in my opinion – not too little, not too many. MOAT can give a portfolio valuable exposure to some of the best companies in the world that aren’t available on the ASX, such as Amazon.com, Inc. (NASDAQ: AMZN) and Walt Disney Co (NYSE: DIS), which is something that many Aussie investors crave.
MOAT has a management fee of 0.49%, which in my opinion is very competitive for an actively-managed ETF.
But the primary reason I like MOAT is simple – it has outperformed the S&P 500 index over 1 year, 3 years and 5 years and has returned over 20% per annum since its inception in 2012. Warren Buffett himself has stated that an S&P 500 index fund is a great investment and so anything that has outperformed this index over a long period of time gets the tick of approval from me. It’s clear the research strategy that MOAT uses is an effective investing strategy and I will continue to buy into this ETF in the future.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of VanEck Vectors Morningstar Wide Moat ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Walt Disney. The Motley Fool Australia has recommended Amazon, VanEck Vectors Morningstar Wide Moat ETF, Vanguard MSCI Index International Shares ETF, and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.