Network Effect is present when the value of a service grows as more people use a network.

Cost Advantage allows firms to sell at the same price as competition and gather excess profit and/or have the option to undercut competition.

Lastly, Efficient Scale is when a company serves a market limited in size, new competitors may not have an incentive to enter.

The result is a company with wide economic moats that enjoy structural competitive advantages to generate high returns on capital for an extended period and sustainable returns on capital, which are much more important than high returns on capital. Essentially, Lane argued that economic moats help reflect a company’s intrinsic value.

The VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT) implements Morningstar’s economic moat rating to identify strong companies with wide economic moats. The VanEck Vectors Morningstar International Moat ETF (NYSEArca: MOTI) takes a similar moat rating methodology to select overseas component holdings. The recently launched VanEck Vectors Morningstar Global Wide Moat ETF (GOAT) implements its economic moat indexing methodology with an all-encompassing global exposure.

“Morningstar’s moat investing philosophy combines the rigorous, forward-looking economic moat and valuation research into the Morningstar Wide Moat Focus Index that targets quality, wide-moat companies trading at attractive prices. It reconstitutes on a quarterly basis in order to capture this investment opportunities consistently throughout the year,” Lopez added.

Financial advisors who are interested in learning more about the smart beta strategy can watch the webcast here on demand.