Companies that create and maintain a lasting competitive advantage can be some of the best long-term investment opportunities you'll ever find. Although competition usually brings down most companies eventually, a few industry leaders manage to produce outstanding returns for years or even decades as they take full advantage of their business opportunities.
To invest in these market leaders, you've typically had to ferret them out and buy the stocks individually. But a new exchange-traded fund seeks to gather them up in one place for you. Let's take a closer look at the ETF and the stocks it invests in.
Crossing the moat
The brand-new Market Vectors Morningstar Wide Moat Research ETF started trading earlier this week. The ETF's methodology relies on what Morningstar calls its Economic Moat Rating, which looks for companies that will both earn outstanding returns on their capital and be able to sustain those high returns even in the face of competitors.
Morningstar identifies several ways that companies establish moats. In some cases, intangible assets like a powerful brand name create big profits. For others, cost advantages that result from either a favored way of doing business or economies of scale that smaller competitors can't achieve produce strong returns. And especially as the Internet has brought increasing attention on building networks of customers, companies that capitalize on network effects and that make it impossible or impractical to switch to other providers capture customers for the long run, building an ever-increasing competitive advantage over would-be disruptors in their industries.
Haves and have-nots
One interesting impact of using that definition to define the ETF's 20-stock portfolio is that some industries have disproportionately large representation in the ETF, while others get left out completely. In particular, technology, financials, and materials stocks get more weight, while consumer staples and telecom stocks have no representation within the fund.
It's hard to argue against some of the biggest companies in the ETF. Google and Cisco
But some of the other stocks in the ETF may raise some eyebrows. St. Joe Company
Moreover, the absence of other companies is also hard to explain. To produce more balance across industry sectors, consumer giants Coca-Cola and Procter & Gamble
A good idea
Regardless of whether you agree with the Market Vectors ETF's particular choices, searching out companies with lasting competitive advantages can produce great results. Even if you don't invest in the ETF, you can use its picks as a great starting point for further research for your individual-stock portfolio.
The best stocks can serve you well for years. Get some great ideas from The Motley Fool's special report on retirement investing, where you'll learn three stock names that could help you reach your financial goals. It's free, so get your free report today and start preparing for a richer retirement.Fool contributor Dan Caplinger was a natural at playing follow the leader. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola, Google, Cisco Systems, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Pfizer, Coca-Cola, Procter & Gamble, Exelon, Amazon.com, and Google, as well as writing a covered straddle position in Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is the tops.