More exchange traded fund providers are partnering up with other firms to create customized indices in what we now refer to strategic or smart beta offerings as a way to help investors enhance returns.
ETF Trends publisher Tom Lydon spoke with Pat Finn, Director of ETF Business Development for VanEck, at the 2017 Morningstar Investment Conference in Chicago April 26-28 to talk about their partnership with Morningstar.
“We have been a partner of theirs for some time, harnessing their wide moat methodology,” Finn said.
For example, the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s economic moat rating to identify strong companies with wide economic moats, recently crossed over its five-year anniversary.
VanEck and Morningstar’s most recent venture highlighted the international side through VanEck Vectors Morningstar International Moat ETF (NYSEArca: MOTI), which takes a similar moat rating methodology to select overseas component holdings.
“In its most simple form, it is taking Morningstar’s best picks from their analysts – very bright minds – and harnessing that as the right entry point,” Finn said.
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.
An investor would end up with the most attractively priced stocks among the companies that have garnered the “wide moat” rating.
The underlying index is rebalanced quarterly, which may also provide an opportunity to enhance returns as those that have already achieved value are replaced with potential opportunities.