One of the key elements of a wide moat company is switching costs. It’s also easy to explain to ETF investors: Put simply, switching costs are the costs a customer incurs to shift from one service provider or supplier to another.
On the surface, paying a lower price to another vendor may seem like a good idea, but the downtime between departing one system and moving to another along with getting employees up to speed on a new platform is costly in its own right.
That lost human capital highlights the benefits that accrue to companies holding the switching costs, including those residing in exchange traded funds such as the VanEck Vectors Morningstar Wide Moat ETF (MOAT), the VanEck Morningstar ESG Moat ETF (CBOE:MOTE), and the VanEck Vectors Morningstar International Moat ETF (MOTI).
“Switching costs provide a company with the leverage to increase prices and deliver hefty profits over time. They are a key competitive advantage and are evident in a range of industries, from banks, to computer software/hardware, to telecoms, among others,” wrote Brandon Rakszawski, VanEck director of product management.
The $6.3 billion MOAT follows the Morningstar Wide Moat Focus Index and many of its current and former holdings possess switching costs advantages. Former holdings are relevant as well because the Morningstar Wide Moat Focus Index rebalances frequently and names that were sent packing at one rebalance can and do reappear following another rebalance.
One of those examples is cloud computing giant Salesforce.com (NYSE:CRM), which is a member of the Dow Jones Industrial Average.
Salesforce “is a leader in providing cloud-based solutions that address many aspects of customer acquisition and retention. According to Morningstar, its salesforce automation application is ‘mission-critical software that helps drive revenue for users.’ Morningstar notes the high organizational risk of moving away from the platform, as well as the time, expense, and lost productivity associated with the implementation of a new application,” adds Rakszawski.
Among current MOAT components that possess switching cost advantages are Zimmer Biomet Holdings (NYSE:ZBH) and Amazon (NASDAQ:AMZN) by way of Amazon Web Services (AWS) – its cloud computing business.
Medical device giant Medtronic (NYSE:MDT) and software maker Adobe (NASDAQ:ADBE), two more MOAT member firms, also offer investors the switching cost advantage. There’s something to be said for the wide moat methodology as MOAT is beating the S&P 500 by 370 basis points year-to-date.
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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.