A smart beta exchange traded fund that focuses on quality companies with a competitive advantage may serve as a stable long-term play, and its weighting methodology also helped provide some short-term surprises as well.
For example, the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s economic moat rating to identify strong companies with wide economic moats, and can help investors achieve improved long-term, risk-adjusted return. From late 2002 through the end of the second quarter, the strategy has delivered an average 4.7 percentage points of annual outperformance relative to the benchmark Morningstar U.S. Market Index.
However, this wide moat narrative was largely pushed to the side over the second quarter as the specific sector tilts and targeted company plays helped the funds outperform.
“Through the end of the second quarter, the index outpaced its benchmark by nearly 5 percentage points. Although stock selection has historically driven the lion’s share of excess returns, the narrative was different in the second quarter. Instead, sector allocation positioning accounted for 71% of excess returns,” according to a Morningstar report.
Related: Companies’ Competitive Cost Advantage Helps This ETF Outperform
MOAT includes a hefty 33.2% tilt toward the health care segment, followed by consumer discretionary 22.4%, industrials 12.3%, information technology 10.7%, financials 10.4%, materials 5.0%, consumer staples 3.6% and real estate 2.7%. Compared to other major indices, the portfolio has not been weighed down by energy, which have largely been underperforming due to the oil weakness.
“This was driven by the benefits of the index’s overweight position in the healthcare sector and underweight position in the energy sector. However, healthcare stock selection actually weighed on portfolio returns, although no single healthcare holding stands out as a major detractor. This was largely offset by strong stock selection from the technology sector, as Guidewire Software (GWRE) and Cerner (CERN) have delivered excellent results,” Morningstar added.
MOAT includes a 2.9% position in Guidewire Software and 1.5% in Cerner Corp.
Furthermore, the MOAT methodology currently leans toward growth names rather than value stocks, which may also have helped contribute to recent gains in a growth-oriented bull rally this year.
For more information on alternative index-based strategies, visit our smart beta category.