This ETF beat S&P 500 and Warren Buffett's returns

During Berkshire Hathaway's AGM in 1995, Warren Buffett used the analogy of a 'moat' to explain how he examine the competitive advantage of a business.

"What we're trying to do is we're trying to find a business with a wide and long-lasting moat around it, surround -- protecting a terrific economic castle with an honest lord in charge of the castle."

A moat is a defensive feature commonly found surrounding castles or fortresses, comprising a deep, wide water-filled ditch intended to protect the fortress from attackers.

Similarly in a capitalistic society, any business is expected to have competitors who want to capture market share. A competitive advantage, or in Buffett words, a moat, is required to protect market share.

Furthermore, a robust moat would enable the business to retain its pricing power and attain above-average profit margins, leading to handsome rewards for the shareholders.

However, identifying the presence of a moat can be a challenging task. Buffett only provided a few hints regarding the process:

"What we're trying to find is a business that, for one reason or another -- it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all, that it has this moat around it."

Identifying a moat can still be a rather vague and arduous process, and it may require significant effort and expertise. As a result, most investors may not possess the requisite skills or have the time to undertake this analysis.

Fortunately, there is an exchange-traded fund (ETF) available that can invest in a diversified portfolio of stocks possessing competitive advantages.

Morningstar, a financial services firm, has created a framework for categorizing moats, and the benefit is that the firm's analysts have already identified companies that meet these criteria.

The VanEck Morningstar Wide Moat ETF (MOAT) invests in about 50 of these companies, which we can readily purchase without conducting any stock research. (This ETF also made my list of the Best ETFs for 2024.)