Investors who are in it for the long-haul should think about the investments that have staying power and will provide long-term returns, like exchange traded funds that track companies with wide economic moats or competitive advantages.
For instance, the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT) and VanEck Vectors Morningstar International Moat ETF (NYSEArca: MOTI) can help investors track both domestic and foreign equities that exhibit sustainable competitive advantages.
Specifically, MOAT tracks 20 high-quality companies while MOTI follows 50 quality international names. The two funds only target the most attractively priced companies and those with a wide economic moat.
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MOAT and MOTI’s underlying indexing methodology have helped the ETF strategies outperform the broader markets. The Morningstar’s moat philosophy tries to identify companies with structural competitive advantages that could help investors earn above-average returns on capital over a long period of time.
The Morningstar Moat Focus Indices target companies with a wide economic moat or sustainable competitive advantages and focuses on the most undervalued moat stocks, which have helped generate significant excess returns relative to the overall market.
For instance, in its most recent rebalancing, the Morningstar index found that the healthcare sector was the most attractive valued after underperforming the broader equities market. Consequently, MOAT added more healthcare positions, which now make up 39.4% of the ETF’s portfolio, whereas the outperforming materials sector now only makes up 4.8% of the fund.
[related_stories]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.
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.
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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.