Warren Buffett (Trades, Portfolio) has repeatedly said that non-professional investors should use index funds instead of buying individual stocks. In fact, he specifically named Vanguard S&P 500 index fund due to the fund’s ultra-low expense ratio.
Admittedly, if one has invested in the Vanguard S&P 500 index fund over time (no market timing involved), one would have done very well in the long run. But what if you can invest in a low cost index fund that is very likely to beat the S&P 500 index with arguably low risks and higher quality companies? This idea may sound a tad provocative and too good to be true.
This fund is Market Vectors Wide Moat ETF (MOAT, Financial), which is based on the Morningstar Wide Moat Focus Index (MWMFTR). According to the index description, MWMFTR is a rules-based, equal-weighted index intended to offer exposure to the 20 most attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
Note the bolded words. For a company to be included in the index, not only does it have to have a sustainable competitive advantage but also have to be attractively priced. Morningstar keeps track of a list of wide-moat lists and ranks the companies within the last according to the price to fair value. Therefore, while a company such as Procter and Gamble has one of the widest moats, it won’t be top ranked unless the price is attractive. Below are the latest holdings of MOAT. Readers may note that it is not exactly equally weighted. This is because as prices change every day, market value and hence percentage of net assets of each holding will change accordingly. A daily rebalancing will result in unnecessary large trading cost so the rebalance is done on a quarterly basis.
| All Fund Holdings as of 03/03/2014 | |||||
| Number | Holding | Ticker | Shares | Market Value | % of net assets |
| 1 | Intuitive Surgical | ISRG US | 79,041 | $35,871,967.44 | 5.94% |
| 2 | Eli Lilly & Co | LLY US | 579,799 | $34,505,179.44 | 5.71% |
| 3 | Compass Minerals Internation | CMP US | 394,529 | $33,816,772.28 | 5.60% |
| 4 | Ebay Inc | EBAY US | 564,109 | $32,893,195.79 | 5.45% |
| 5 | Spectra Energy | SE US | 874,687 | $32,651,839.26 | 5.41% |
| 6 | Oracle Corp | ORCL US | 838,494 | $32,290,403.94 | 5.35% |
| 7 | Accenture Plc-Cl A | ACN US | 389,491 | $32,133,007.50 | 5.32% |
| 8 | Express Script | ESRX US | 430,967 | $32,089,802.82 | 5.31% |
| 9 | Exelon Corp | EXC US | 1,034,572 | $31,383,881.32 | 5.20% |
| 10 | Schlumberger Ltd | SLB US | 336,409 | $30,833,140.54 | 5.10% |
| 11 | IBM | IBM US | 165,402 | $30,627,536.12 | 5.07% |
| 12 | Baxter Intl Inc | BAX US | 432,704 | $29,808,978.56 | 4.93% |
| 13 | Berkshire Hathaway Inc-Cl B | BRK/B US | 253,066 | $29,370,839.96 | 4.86% |
| 14 | Western Union | WU US | 1,747,788 | $28,995,802.92 | 4.80% |
| 15 | McDonalds Corp | MCD US | 304,200 | $28,938,546.00 | 4.79% |
| 16 | Sysco Corp | SYY US | 784,046 | $28,225,656.00 | 4.67% |
| 17 | Kinder Morgan Inc | KMI US | 889,452 | $28,142,261.28 | 4.66% |
| 18 | Coca-Cola Co/The | KO US | 722,109 | $27,526,795.08 | 4.56% |
| 19 | C.H. Robinson Worldwide Inc | CHRW US | 505,114 | $26,139,649.50 | 4.33% |
| 20 | Weight Watchers | WTW US | 897,440 | $18,918,035.20 | 3.13% |
| 21 | Other/Cash | Ă‚ | 0 | ($1,070,111.72) | -0.18% |
MOAT was launched in late 2012 and underperformed S&P by a very thin margin in 2013 (MOAT netted a 30.88% total return versus S&P’s 32.39%). One year is too short to make any definitive conclusion about future performance,s but it seemsthat for non-professional investors who adhere to Buffett’s “buying wonderful business at fair prices” advice, MOAT may deserve some allocation in the portfolio.
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