A company’s intangible assets help provide a strong competitive advantage over other businesses, and one exchange traded fund strategy has honed in on this attribute to help investors get a leg up on the market.
“Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key source of economic moats,” Brandon Rakszawski, ETF Product Manager for VanEck, said in a research note. “Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licenses, and business methodologies. Intangible assets help companies to safeguard key competitive advantages…. A company’s reputation, often measured by goodwill and brand recognition, is also considered an intangible asset.”
According to Morningstar equity research, 60% of its domestic and international moat-rated companies have achieved a “wide economic moat” designation because of intangible assets.
“Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company’s products, or allow the company to charge a significant price premium,” according to Morningstar.
To better illustrate the benefits of intangibles, Rakszawski pointed to so-called wide moat companies like Bristol-Myers Squibb and Lowe’s Companies.
Specifically, Bristol-Myers Squibb holds an extensive list of patent-protected drugs, global sales force and economies of scale. Its patent protection allows the company to price drugs at levels that translate to better returns on invested capital compared with its costs. Furthermore, the company enjoys brand identity, large scale and healthy balance sheets with ample cash.
Lowe’s intangibles includes a business built on customer service, knowledge and innovation, along with competitive advantages based on its information technology platform and distribution network.
Investors interested in gaining exposure to companies with robust intangible assets and a wide economic moat may turn to the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s wide moat methodology. MOAT includes a 2.5% tilt toward Bristol-Myers Squibb and a 2.4% position in Lowe’s.
For more information on alternative index-based strategies, visit our Smart Beta Channel.