The Vaneck Morningstar Wide Moat ETF (ASX: MOAT) is an exchange-traded fund (ETF) with a number of positives to like about it. But there are a few downsides as well.
The idea of it is that it's invested in a group of US businesses that are chosen by analysts from Morningstar because of certain characteristics, which I'll get to in a moment.
Let's look at the positives first.
Pros
Over the past five years, it has produced an average return per annum of 15.6%, which outperformed the S&P 500 (INDEXSP: .INX) which delivered an average return per annum of 13% over the same time period.
Past performance is not indicative of future performance, particularly when we're talking about such a high level of returns. However, with the investment style of the MOAT ETF, I think it can keep producing good long-term returns.
The first thing to know, and perhaps the most important element of this investment, is that the fund only considers investing in businesses that are seen to have competitive advantages and are expected to almost certainly endure for the next decade, if not two decades.
The competitive advantages can also be called an economic moat. The moat is meant to defend the company against competitors that are trying to attack.
Morningstar analysts have picked out different sources of competitive advantages, including cost advantages, intangible assets, switching costs, network effects and efficient scale. Examples include brand power, patents and regulatory licenses.
Some of the businesses that are currently in the portfolio and pass the economic moat test include Comcast, Alphabet, Wells Fargo, Charles Schwab, Tyler Technologies and Gilead Sciences.
Shares are only bought for the portfolio if they are trading at an attractive price relative to Morningstar's estimate of fair value.
Negatives of the MOAT ETF
There aren't too many negatives, but there are a few downsides to keep in mind.
First, it's a portfolio of just US businesses. Vaneck Morningstar Wide Moat ETF offers diversification away from ASX shares, but it doesn't offer the same sort of geographic diversification that an option like Vanguard MSCI Index International Shares ETF (ASX: VGS) does, though that may not necessarily be a bad thing for returns.
Second, the annual management fee is 0.49%. That's quite low compared to a lot of active fund managers, but it's noticeably more than a cheap ETF offering global diversification such as iShares S&P 500 ETF (ASX: IVV) which has an annual management fee of 0.04%.
Finally, it usually has a low dividend yield because of the types of businesses that it invests in – ETFs typically just pass through the dividend income they receive. Some investors may not be after dividends, but if income-seekers are wanting consistently high dividend yields, then the MOAT ETF may not be the right option.
Foolish takeaway
I think the MOAT ETF has a portfolio of strong, enduring businesses that are nicely valued, which seems to be a good starting base for good potential (out)performance.
