For an ETF dedicated to companies with sustainable competitive advantages — or “wide moats” to borrow a term from Warren Buffett — you might expect relatively low turnover. After all, moats don’t dry up overnight.
Yet in its annual reconstitution last month, the Market Vectors Wide Moat ETF (MOAT), which is based on the Morningstar Wide Moat Focus Index, replaced 9 of its 20 holdings. Sizemore Investment Letter favorite Kinder Morgan (KMI) was a new addition, as was longtime Buffett holding Coca-Cola Co (KO). And rounding out the newbies were Spectra Energy Corp (SE), Sysco Corp (SYY), CSX Corp (CSX), Allergan Inc (AGN), Covidien PLC (COV), ITC Holdings (ITC) and Medtronic (MDT).
Getting booted off the list were Expeditors International (EXPD), Qualcomm (QCOM), National Oilwell Varco (NOV), Schlumberger (SLB), Vulcan Materials (VMC), Maxim Integrated Products (MXIM), Amgen (AMGN) and Caterpillar (CAT).
But there was one removed holding that really stood out: social media darling Facebook (FB).
What exactly is going on here? Last I checked, Facebook still had an unassailable moat in its particular niche of the social media world, which consists of photo sharing and social networking. Its “competitors” have businesses that only overlap at the edges.
Twitter has evolved into primarily a news aggregation and announcement service, and LinkedIn (LNKD) is a place to swap résumés. And Facebook has one of the strongest network effects in place of any company in existence. (Network Effect is one of Morningstar’s five competitive advantages. The other four are High Switching Cost, Cost Advantage, Intangible Assets — i.e. powerful branding — and Efficient Scale.)
Likewise, while I can make a strong case for the quality of the moats of any of the new entrants, I could just as easily make a strong (or stronger) case for most of those exiting. For example, Qualcomm technology goes into virtually every smartphone, and Amgen has size and scope that few of its competitors in biotech can match.
So what gives? Why the high turnover in a portfolio of wide-moat businesses?