Question:

Hi Mark

In response to your wonderful article.

VanEck Morningstar Global Wide Moat ETF (MOTG)

Similar to MOAT, this ETF focuses globally and includes companies from countries like the U.S., U.K., and Japan. It holds companies with strong moats and long-term competitive advantages while aiming for value during market downturns. This ETF invests across various sectors like industrials, financials, and consumer staples

Thanks for your inspiring work

Answer:

For readers, this question is referring to this article on the perfect ETF. 

I am aware of the MOTG ETF from Van Eck. They ETF tracks an index that is licensed from Morningstar. While the ETF is not issued by Morningstar we do earn revenue from licensing the index.

The first thing to note is that this ETF trades on a US exchange. Australian investors can purchase this ETF if they have access to global exchanges through their broker although there may be tax consequences which my colleague Shani has outlined in this article.

First a bit about this ETF. The ETF uses our analyst ratings as the foundation for selecting shares. The first screen is that all shares selected have a Wide Moat Rating from our analysts. Next that universe of wide moat rated shares is ranked based on a comparison of the price to our estimate of fair value. Only the cheapest shares are selected for the ETF.

On the surface this looks a lot like what I outlined in my article on the perfect ETF. I think buying great companies at reasonable prices is a good approach for long-term investment success. And I am certainly a proponent of finding shares with sustainable competitive advantages or moats. I think the benefit of investing in a share with a moat is that over time the advantage of the moat will accrue to shareholders.

The concern I have with this ETF is that it is not designed to hold shares over the long-term. Twice a year all of the wide moat shares are reassessed on a valuation perspective and shares that are no longer the cheapest are exchanged for those that are. This can lead to high turnover. And in the case of MOTG the turnover is 73% currently. That means that 73% of the shares are changed each year. I think the advantage of investing in a share with a moat is that over time the advantage of the moat will accrue to shareholders. In this case the shares are not being held for the long-term.

That is the problem I was trying to solve with my proposal for the perfect ETF. What matters for investors is not just absolute returns. It is after tax returns. That represents the money that an investor actually gets to keep.

I don’t think MOTG is a bad ETF. Far from it. I think finding cheap shares with wide moats is a good approach and I respect and trust our analyst research which forms the basis for this ETF. An ETF that is tracking an index like the Morningstar Wide Moat Morningstar Global Wide Moat Focus is always going to have turnover. And investors need to weigh that turnover against the advantages of owning great companies that are trading at attractive valuations. Depending upon your situation this may be a worthwhile trade-off to make.

In my article I was trying to come up with the ‘perfect ETF’. This was a bit of an academic exercise. There is no such thing as perfect. But I feel strongly that finding great companies at a reasonable valuation is just the first step. Once you’ve found those companies holding them for the long-term has a lot of advantages for investors.

Have a question? Write me at [email protected] 

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Articles mentioned:

Previous editions of Mark to market can be found here.