The popularity of factor-based smart beta investment strategies has surged in 2018 as advisors look to rules-based indexing methodologies to enhance returns and minimize drawdowns. Specifically, savvy advisors are embracing “wide moat” smart beta ETF strategies to access many quality global companies.
On the upcoming webcast, Moat Investing through a Factor Lens, Edward Lopez, Head of ETF Product Management at VanEck, Andrew Lane, Chairman of Economic Moat Committee for Morning Star, will explore the benefits of moat investing strategies that can enhance portfolios through a smarter investment style.
Specifically, 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.
The economic moat investment strategy can help investors achieve improved long-term, risk-adjusted return by focusing on quality companies that help limit downside risk while still participating in potential gains.
The Morningstar Economic Moat Rating methodology assign an economic moat rating to companies, but it also focuses on those that show attractive valuations or are more attractively priced. Beyond factor effects, stock selection is also an important driver as the underlying indices combine both quality and valuation to help investors potentially generate improved returns.
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.
Financial advisors who are interested in learning more about the smart beta strategy can register for the upcoming Tuesday, November 6 webcast here.