VanEck has launched a new ETF which serves as a socially responsible version of the firm’s $6.8 billion ‘Wide Moat’ US equity ETF.

Wide moats are significant structural competitive advantages that have the potential to provide long-term above-average returns.

The VanEck Morningstar ESG Moat ETF (MOTE US) has been listed on Cboe BZX Exchange.

Like the original VanEck Morningstar Wide Moat ETF (MOAT US), MOTE harnesses insights from Morningstar’s equity analysts to select firms considered to possess ‘wide moats’ – a significant structural competitive advantage that has the potential to provide long-term above-average returns.

The term ‘economic moat’ was coined by Warren Buffett and can refer to brand loyalty, cost advantages, economies of scale, or regulatory protection, among others, as potential avenues whereby firms establish a strong market position.

MOTE differs from its predecessor by also incorporating insights from Environmental, Social, and Governance research firm Sustainalytics to enhance its ESG profile. It does this by screening out companies that are embroiled in severe ESG-related controversies, operating in industries considered to be controversial, or assessed to be poorly managing ESG risks relative to industry peers.

Brandon Rakszawski, Senior ETF Product Manager with VanEck, said: “Our flagship VanEck Morningstar Wide Moat ETF has been well-received by the investor and advisor marketplaces since its inception in 2012. In order to meet growing demand for more sophisticated ESG investing approaches, we’re very pleased to be introducing MOTE, a natural progression of both our moat and ESG-focused efforts.

“ESG risks are, after all, business risks. Being able to focus on US companies with both sizable moats and reduced ESG concerns relative to their peers makes MOTE a potentially powerful addition to a core equity portfolio.”

Methodology

The fund tracks the Morningstar US Sustainability Moat Focus Index which screens a universe of US-listed equities for companies with a ‘Wide Moat’ Morningstar analyst rating.

The Morningstar Wide Moat methodology focuses on five key sources of competitive advantage. These include network effects, the increase to customer value as more customers use the service (eBay being a good example); intangible assets, including brand loyalty, patents, and regulatory licenses; cost advantages, allowing firms to undercut potential rivals; switching costs, the expense of money or time borne by customers who wish to switch providers; and efficient scale, whereby natural positioning or sunken infrastructure costs deter new firms from entering the market.

Using data from Sustainalytics, any company with a ‘High’ ESG controversy score, ESG risk score, or Carbon risk score is eliminated. Firms involved in controversial weapons, civilian firearms, and thermal coal, as well as companies deriving more than 50% revenue from tobacco, are also removed.

The index then targets 40 constituents, selecting the firms with the lowest current market prices relative to Morningstar’s estimate of fair value. Constituents are equally weighted, and the index is reconstituted annually using a semi-annual staggered reconstitution schedule. Buffer rules help to limit unnecessary turnover.

Once the index is constructed, it is evaluated regarding its portfolio-level ESG profile. Specifically, the index must have a Morningstar sustainability rating of at least Four Globes (Morningstar’s rating scale runs from one to five Globes). If the index fails this analysis, the constituents with the worst ESG ratings are iteratively replaced until the Four Globe rating is met.

The ETF comes with an expense ratio of 0.49% which is two basis points higher than the original non-ESG-screened MOAT.

VanEck’s suite of moat-strategy ETF also includes funds targeting global ex-US and global equity markets, namely the $70m VanEck Morningstar International Moat ETF (MOTI US) and the $20m VanEck Morningstar Global Wide Moat ETF (GOAT US).