As we head toward the ninth year of our current bull market run, we will have to be pickier and evade potentially overbought areas of the equities market. For example, through a targeted exchange traded fund strategy, investors can focus on quality companies with wide economic moats that help provide a long-term competitive advantage.
Specifically, the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT) tries to reflect the performance of the Morningstar Wide Moat Focus Index, which is comprised of attractively priced companies with sustainable competitive advantages.
According to Morningstar’s indexing methodology, there are five sources of economic moats: Intangible assets that include brand recognition to charge premium prices. Switching costs that make it too expensive to stop using a company’s products. Network effect that occurs when the value of a company’s service increases as more use the service. A cost advantage helps companies undercut competitors on pricing while earning similar margins. Lastly, efficient scale associated with a competitive advantage in a niche market.
By focusing on companies with wide economic moats, MOAT incorporates firms that stay profitable for a long time through competitive advantages that protect profits.
The Morningstar Moat Focus Indices target companies with a wide economic moat or sustainable competitive advantages and targets the most undervalued moat stocks, which have helped generate significant excess returns relative to the overall market. The strategy has been outperforming the broader equities market, with MOAT up 34.2% over the past year, compared to the S&P 500’s 23.0% return.