Investors considering a core investment portfolio position should look to an exchange traded fund strategy focusing on quality companies with wide economic moats that help provide long-term competitive advantages.
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.
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 wide moat ETF’s underlying index’s methodology has helped the fund outperform the broader market. MOAT increased 7.9% year-to-date while the S&P 500 rose 5.3%. Over a longer three-year period, MOAT has shown an average annualized 11.1% return, compared to the S&P 500’s 10.9% gain.
The wide moat ETF may also be seen as a passive smart-beta play that incorporates actively managed investment styles. Brandon Rakszawski, Product Manager at VanEck Global, told ETF Trends that “MOAT is ‘quasi-active.'” explaining that the fund’s rules-based underlying index screens for factors that may traditionally be found in active management.
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.
Morningstar raised railroad operator CSX Corp (NYSE: CSX) fair value estimate in late January to equally reflect better pricing, according to VanEck. CSX enjoyed a 29.1% surge in January on the heels of improved coal market conditions and outlook, along with a boost from speculation that industry veteran Hunter Harrison might take over CSX management duties.
MOAT was also supported by outperformance in consumer discretionary and information technology companies, led by Twenty-First Century Fox (NasdaqGS: FOXA) and salesforce.com (NYSE: CRM). The ETF includes a 21.4% tilt toward consumer discretionary and 10.0% to information tech.
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