Lastly, efficient scale associated with a competitive advantage in a niche market. A market of limited size is effectively served by a few companies where incumbents generate economic profits and newcomers are discouraged from entering due to lower profit margins.
Given these factors, Dan Lefkovitz, Content Strategist of Indexes at Morningstar, pointed out that Morningstar has been able to build a strategic beta index through the strong investment thesis of outperformance in companies with wide economic moats.
“We back each thesis with our extensive high-quality data and the body of research that emerges from the Morningstar Investment Research Ecosystem,” Lefkovitz. “We take a measured, disciplined approach to developing new index products that clearly defines the outcomes we want to achieve.”
For example, Brandon Rakszawski, Product Manager at VanEck, pointed to the VanEck Vectors Morningstar International Moat ETF (NYSEArca: MOTI) and VaneEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT) as two popular ways to implement Morningstar’s economic moat rating to identify strong companies with wide economic moats.
Only “quality companies with attractive valuations are selected for Morningstar’s moat indices,” Rakszawski said.
The underlying 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 indexing methodology may help investors outperform the broader market.
“The Morningstar Wide Moat Focus Index has historically outperformed the broad U.S. equity markets and fund managers as represented by its Morningstar U.S. Funds Large Blend category average,” Rakszawski said.
Financial advisors who are interested in learning more about the current markets and an ETF strategy that implements Morningstar’s indexing methodology can watch the webcast here on demand.