The wide moat ETF’s underlying index’s methodology has helped the fund outperform the broader market. MOAT increased 9.3% year-to-date while the S&P 500 rose 6.9%. Over a longer three-year period, MOAT has shown an average annualized 11.5% return, compared to the S&P 500’s 11.2% gain.
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.
Like its U.S.-focused counterpart, the international-focused MOTI uses Morningstar’s proprietary methodology to identify global 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.
Financial advisors who are interested in learning more about the current markets and an ETF strategy that implements Morningstar’s indexing methodology can register for the Tuesday, March 7 webcast here.