After what feels like an eternity of underperformance, international stocks are finally getting their groove back when measured against domestic counterparts. Year-to-date, the widely followed MSCI ACWI ex-USA Index is beating the S&P 500 by nearly 130 basis points.
Some more nuanced strategies are doing even better. In the case of the VanEck Morningstar International Moat ETF (MOTI), that exchange traded fund is beating the S&P 500 by nearly 500 basis points, proving that the merits of wide moat investing are not confined by geographic borders.
That could be the start of something more substantial for the $207.6 million MOTI, which turns eight years old in July. Notably, there’s fuel for the MOTI fire because fund flows data indicate that professional investors are swapping out of domestic stocks in favor of international fare.
“This year, signs of a reversal are apparent. Investors removed $28.8 billion from U.S.-focused equity mutual funds and ETFs through the first two months of 2023 while international-focused equity funds welcomed $16.8B of new investment, according to Morningstar,” noted Brandon Rakszawski, VanEck director of product management. “With many risks in the market, whether this trend will persist remains to be seen, but multiple forces are positive for international companies: a weakening dollar and expectations for a sideways and volatile U.S. equity market for the foreseeable future, among others.”
As Rakszawski noted, one of the primary reasons that wide moat investing (domestic and international) is in style this year is because market participants are increasingly prizing high-quality companies. Due to their steep competitive advantages, wide moat firms check that box.
An extension of that theme is that wide moat characteristics are often sported by companies with other quality traits, including solid credit ratings, steady management teams, and growing dividends. Plenty of MOTI’s 71 member firms fit those bills. The quality/wide moat intersection helps MOTI differentiate itself from standard international equity ETFs.
“Looking outside the U.S., the Morningstar Global ex-US Moat Focus Index (‘International Moat Index’) has separated itself from the international markets in recent periods. It reflects the ethos of Morningstar’s broader moat investing philosophy: invest in quality moat-rated companies that are also trading at attractive prices. This approach has yielded impressive results,” added Rakszawski.
Adding to the allure of MOTI is that it’s geographically and market classification diverse. The ETF features exposure to stocks from 18 countries, and nearly 35% of its weight is directed to emerging markets stocks. On that note, MOTI is beating the MSCI Emerging Markets Index by more than a two-to-one basis this year.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
