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.
MOAT frequently makes shifts from four to nine additions and deletions to its portfolio at each quarterly rebalance. The ETF tracks an index that uses Morningstar proprietary methodology to identify companies with long-term advantages, which allows companies to earn sustainable excess economic profits, as measured by the return on invested capital relative to the company’s cost of capital.
The underlying index only selects companies that maintained their competitive advantage for 10 or 20 years as a way to avoid one-hit wonders that benefited from a single good period.
Due to its indexing methodology, the Morningstar wide moat strategy has outperformed against the S&P 500 over long-term holding periods. For instance, the Morningstar Wide Moat Focus Index has shown an impressive “batting average” against the S&P 500 – batting average in this instance is seen as how often a strategy outperformed a benchmark through various periods over time.
Over a five-year rolling period, the wide moat strategy has outperformed 91% of the time against the S&P 500, according to Morningstar data. However, over 1-month rolling periods, the wide moat index has only outperformed 48% of the time. This suggests that investors are better off using MOAT and MOTI as long-term core positions, instead of trying to time the market through short-term, tactical trades.