With less than two months left in 2021, it's accurate to say this year brought another bumper crop of new exchange traded funds. When the final tally is revealed, it will likely be another record for ETF debuts and that record could be set by a fairly healthy margin.
As is always the case, some new ETFs push the limits of what's relevant to clients and not all merit places in portfolios. Many of those funds won't even make it onto advisor platforms. All that said, plenty of new ETFs catch clients' attention and some of those funds are worth evaluating.
There's no secret recipe for what makes a new ETF successful, but it doesn't hurt a rookie fund to have at least one of the following traits: Approachable, understandable underlying investment concept, issuer brand recognition, low fees and a strategy that's not only relevant when the fund comes to market, but one that can be durable over the long-term.
The VanEck Morningstar ESG Moat ETF (CBOE:MOTE), which debuted in early October, checks several of those boxes. MOTE is the environmental, social and governance (ESG) counterpart to the VanEck Morningstar Wide Moat ETF (CBOE:MOAT), which has $7.2 billion in assets under management.
MOTE Has Makings of Winning New ETF
As advisors well know, ESG is at the forefront of many clients minds. They know they want exposure to assets that reflect their personal values. Adding another layer that advisors need to be ready to address is that as ESG and sustainable investing takes off – these are early innings concepts – is clients are getting savvy. Said another way, many are aware that old guard ESG strategies are too prosaic and some of the new entrants in this category are simply greenwashed.
MOTE solves those situations and provides some other sources of allure. The fund tracks the Morningstar US Sustainability Moat Focus Index – the sustainability derivative of the index tracked by the aforementioned, successful MOAT.
“The index is a rules-based index intended to offer exposure to attractively priced U.S. companies with long-term competitive advantages, according to Morningstar, that have been screened for ESG risks,” according to VanEck.
Alone, the wide moat concept is appealing and easily conveyed to clients. For clients that aren't familiar with moat investing, an advisor can say that it's the investing style that made Warren Buffett one of the greatest investors of all-time. Boiling it down to the individual company level, a wide moat firm sports advantages such as brand recognition, intangible assets, high switching costs for customers and, in some cases, monopoly-esque market share.
Examples of MOTE holdings include names clients are undoubtedly familiar with, such as Alphabet (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Nike (NYSE:NKE) and Starbucks (NASDAQ:SBUX).
Exploring MOTE ESG Approach
The Morningstar US Sustainability Moat Focus Index marries Morningstar's famed equity research with Sustainalytics’ ESG research.
“Sustainalytics has built its reputation over the last 25 years as a market-leading ESG research provider. Its risk analysis assigns ratings to over 20,000 securities globally. Sustainalytics has long served the largest asset managers in the industry and has built a reputation as a leading provider of ESG data,” according to VanEck.
Fortunately for advisors, the Sustainalytics approach isn't hard to explain to clients. It centers around ESG risk, which is self explanatory, controversy, carbon risk and product involvement. The controvesy element is backward-looking, but relevant to clients because it “seeks to identify the impact of an incident or series of incidents on the environment and/or society.”
Product involvement is another element clients will easily grasp because it's something they're already familiar with in old ESG funds. The Sustainalytics approach doesn't look favorably upon tobacco companies, weapons manufacturers, including civilian firearms, and coal producers.
Add it all up, and MOTE, despite being new, has a lot of points of attraction for clients. It even has robust inflation-fighting capabilities.
“Many of the most popular sustainable investment strategies seek to offer broad exposure to market indexes while applying some level of exclusionary or inclusionary ESG screens,” concludes VanEck. “This may reduce ESG risk in a portfolio, but does not address other performance drivers. The Morningstar US Sustainability Moat Focus Index’s unique combination of forward-looking equity research and ESG screening offers investors a U.S. equity strategy that seeks to provide investors with attractive risk-adjusted returns while mitigating ESG risks.”