“What it really comes down to is identifying qualities companies and buying them at the right price,” Lopez said.
As a way to gain exposure to quality companies, investors may look at the VaneEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s economic moat rating to identify strong companies with wide economic moats.
In a year where many are looking toward more active styles to pick out areas of opportunities, MOAT may offer investors exposure to smart management.
“It’s technically an index-based ETF and some might call it smart beta, but it’s really just smart investing and it does essentially what I just said – it finds good companies and buys them at good prices,” Lopez 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.
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.