Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some companies with strong competitive advantages to your portfolio, the Market Vectors Wide Moat ETF (NYSEMKT: MOAT ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The Market Vectors ETF's expense ratio -- its annual fee -- is a relatively low 0.49%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF is too young to have a sufficient track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why wide moats?
Companies with wide moats have strong competitive advantages that help them perform better. A well-known and well-loved brand, for example, can bolster market share and even allow for higher prices. A big customer base, such as eBay's, is another, as it makes the company's marketplace a logical place to buy or sell anything. Economies of scale and high switching costs are other possible advantages, among many.
Some wide-moat companies had solid performances over the past year. Semiconductor fabrication equipment maker Applied Materials (NASDAQ: AMAT ) , for example, gained 8%. As the global economy improves, so should its business, and its growing involvement in areas such as solar power also bodes well. Patient investors can collect a 2.6% dividend yield at what seems like an appealing entry price. The stock has also seen some insider buying lately.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. For example, Exelon (NYSE: EXC ) , National Oilwell Varco (NYSE: NOV ) , and Western Union (NYSE: WU ) all dropped 17%.
Exelon is the nation's largest nuclear power company, and is involved in other energy-generation businesses, too. Its dividend yield has been near 7%, but the company just announced a 41% dividend cut. In a sense, that's not such bad news, however, because the money it saves will help it diversify and bolster its revenue stream, in part by upgrading some reactors.
National Oilwell Varco is the biggest U.S. maker of oil-field equipment and a "quiet moneymaker," with operating margins and debt levels comparing favorably with peers and a record capital equipment backlog of nearly $12 billion. It's also involved in the profitable offshore drilling arena (which the company sees growing in 2013), and has been growing in part via acquisitions, as well.
Western Union, meanwhile, has long looked like a bargain, with a dividend yield around 3.4% and a single-digit P/E ratio. Some worry about its future, though, as new money-transfer systems proliferate -- think of eBay's PayPal, for example. It's still a huge cash generator and able to buy back many shares to drive value. Western Union has lowered its prices, raising the specter of profit-margin compression. It just reported fourth-quarter results, with 2012 revenue growing 3% over 2011 and net income down 12%.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.