MOAT 1“It’s (MOAT) underweight the S&P 500’s tech sector exposure by 10% or more,” said Rakzawski. “So it has outperformed the S&P despite being underweight in the best-performing group of stocks in the S&P thus far this year.”

The Morningstar Economic Moat Rating methodology assigns an economic moat rating to companies, but in addition, it focuses on companies exhibiting attractive valuations relative to its price. Furthermore, the indexing methodology uses five sources of economic moats:

  1. Intangible assets with brand recognition for premium pricing options
  2. Switching costs that make it too expensive to stop using a company’s products
  3. Network effect that occurs when the value of a company’s service increases as more use the service
  4. A cost advantage helps companies undercut competitors on pricing while earning similar margins
  5. Efficient scale associated with a competitive advantage in a niche market

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