A Smart Beta ETF That Targets Natural Monopolies

Robust companies that accumulated efficient scale have established themselves in a certain market segment and can potentially provide ETF investors a reliable investment opportunity.

“Efficient scale is a dynamic whereby a market of limited size is effectively served by one or a small handful of companies,” according to Morningstar. “In many of these situations, the existing players earn economic profits, and a potential competitor is discouraged from entering because market entry would cause returns in the market to fall below the cost of capital.”

Brandon Rakszawski, ETF Product Manager for VanEck, explained in a note that these types of companies with efficient scale can be seen as a type of natural monopoly where companies are efficiently scaled to supply a market that is only big enough to support one or a few competitors, which limits competitive pressures.

Additionally, fort thinking about pushing their way into this segment dominated by a company with efficient scale, a market entry often requires very high capital costs, which are not justified by the limited profit potential a new competitor might achieve.

Efficient scale is often found in companies involved in telecommunications, utilities, railroads, pipelines and airports.