It is commonly known that companies with high level of entrance barrier enjoy the power of oligopoly if not monopoly; therefore, they can charge a high premium for the products/services they offer to markets. Investing such high entry barrier, i.e. MOAT companies can bring in ludicrous returns for investors. The concept is coined by Warren Buffet, and now is turned into a product in ETF form; containing a list of these companies with diversified industrial sector distribution would be ideal. MOAT, MOTI, and WMW are three representative products in this realm.
Morningstar’s equity research team took a deep and laborious approach to cherry-pick MOAT companies and build Morningstar Wide Moat Focus Index for both MOAT and MOTI to be benchmarked against. MOAT is based on a U.S. stock universe, while MOTI is on an international market base. WMW, Elements Morningstar Wide Moat Focus Total Return Index ETN, issued by Deutch bank, tracks the same index.
MOAT, issued in April 2012, has since accumulated $1.1 billion assets underneath. MOTI, issued three years later, has amassed only $45 million assets, it’s liquidity is quite limited reflecting on a 0.42% spread. WMW was launched to market much early in October 2007 but has only reached $18 million since. MOAT’s fee isn’t cheap, sitting at 0.49%, WMW’s even higher at 0.75%, a much crazy spread ratio at 2.12% to date, indicating a potential ill fate of this fund.
Morningstar US Market Index (benchmark) is the starting universe for selecting securities into the Morningstar Wide Moat Focus Index. To pick out the MOAT companies, a proprietary moat rating is developed by the MOAT committee, and implemented by the researchers, ensuring consistency and rigor. Ratings are forward-looking, aiming to be sustainable for at least 20 years. They are comprised of the following parts (referencing the Morningstar US Market Index User Guide):
- Intangible assets: ground, brands, name recognition are all belong to intangible assets, allowing the companies to charge higher price to consumers, hence, a higher MOAT score;
- Switching cost: a tremendous cost will incur if the customer decides to switch from one vendor to other, who offer the same or similar products and services, for example, switching a database infrastructure from MSSQL to Oracle database, will be disrupting their business;
- Cost advantage: thanks to the richness of natural resources or other mother nature characteristic providing huge cost advantage to certain companies;
- Network effect: companies like eBay, Facebook, whose value increase when more buyers, sellers, subscribers join the network, making it harder and harder for the subsequent competitor to catch up;
- Efficiency scale: especially in the certain type of business where a large scale of fixed cost is rendered, making it possible for giant players to slash down the unit cost, that other small competitors not able to do.
Take a look at three funds’ performance. WMW’s track record is splendid, however, the high expense ratio, think liquidity, small assets seems not favoring it than MOAT and MOTI. The package format of ETN rather than ETF may play a vital role here.