On this episode of the “ETF of the Week” podcast, Tom Lydon discussed the VanEck Morningstar Wide Moat ETF (MOAT) with Chuck Jaffe of “Money Life.” The pair discussed several different topics regarding the fund to give investors insight into it.
Chuck Jaffe: One fund, on point for today, the expert to talk about it. Welcome to the ETF of the Week. Yes, it’s the ETF of the Week, where we get the latest take from Tom Lydon. He’s the vice chairman at VettaFi, and at VettaFi, they’ve got a tremendous suite of tools that’s going to help you become a smarter, savvier investor in exchange traded funds. Check it out at Vettafi.com. Tom Lydon, it’s great to chat with you again.
Tom Lydon: Great to be back. Thanks, Chuck.
Chuck Jaffe: Your ETF of the Week is?
VanEck Morningstar Wide Moat ETF (MOAT)
Tom Lydon: The VanEck Morningstar Wide Moat ETF, ticker symbol MOAT.
Chuck Jaffe: MOAT. Ticker MOAT. The VanEck Morningstar Wide Moat ETF. Wide moats are normally about safety, Tom. Is this a play that’s based on where you think the market might be headed?
Tom Lydon: Well, it can be about safety. It’s also about market capitalization, market opportunity, and most importantly, beating up on your competitors. Chuck, we’ve had MOAT the ETF of the Week before. We’ve been doing this for a long time and it definitely is a fan favorite. The Moat Morningstar Index has been in place for a long period of time, since 2007. And it’s one of the few diversified funds out there that consistently beats the S&P 500. Since 2007, on average, it beats the S&P 500 by about 2% a year, which is not a small feat. It’s pretty impressive.
The whole idea about this is there’s high concentration, at about 50 or 60 stocks. There’s a rebalance or repositioning of the portfolio every quarter. Because it’s index-based, we absolutely report that out, Morningstar reports that out. But some of the key characteristics of the companies are this, and they are really five.
One is switching costs. The idea that the ability to move to a competitor is so expansive that most clients will not go through it. So that means those types of clients are going to stick around — those being sticky, wide moat. Intangible assets. This is something we’re hearing a lot about these days, as traditional value has now embraced intangible assets and also how those are valued.
Companies like Google and Microsoft have things that you can’t see out in the parking lot or buildings that you can’t count. It’s that intangible IP that now has a value in itself and The Street’s doing a good job of putting those together. The network effect talks about technology and networking. Companies like Netflix have been huge in embracing the network effect. Cost advantage is the ability that when you get to scale, you can actually pass better pricing on to your clients, which again makes it tougher for them to move. And then efficient scale. The whole idea about if a company does things the right way for an extended period of time, and clients appreciate that, shareholders appreciate that. Once they get to a certain size, it’s really tough to beat them, Chuck.
When Should You Ride the Wave?
Chuck Jaffe: It is. And of course, all of the things you were talking about, there are things that would make you say, “I want to own this fund and hold it forever.” But we know that you like trend following, and this fund actually has fallen below its 200-day moving average. So obviously it’s not a trend-following play. Or is it something you’re watching for to say, “I like this long term, but oh, by the way, I want to ride it when the wave says I should.”
Tom Lydon: So that’s a great question. Yes, we always talk about trend following, but I don’t tell people that you should only buy things that are above the average. I think what we’ve done over these years, Chuck, is identify opportunities for ETFs that were below their trend line, and then they may be close to going above. [Last] week, a lot of those tech giants [were]reporting earnings. And again, just a little bit of peek of what we’ve seen so far, they’re pretty impressive. So I think we’re going to be talking about them. And if that’s the case, we may see MOAT go back above its 200-day average.
Diversifying Away From the S&P 500
The other thing, and this is almost more important than anything, the mega-cap companies, the Magnificent Seven that we talk about, their weighting in the S&P 500. Although they’re responsible for two-thirds of the performance of the S&P 500 this year, it’s scary to people. Their valuations are through the roof. And if we continue to depend on these companies to have the growth of the S&P 500 in the future, it may not come to pass. So diversifying away from the S&P 500 is probably something to consider. And when you look at the top holdings in MOAT, you’ve got companies that are not the Magnificent Seven, and that’s really key and critical too.
So go through, lift up the hood, look at all the companies that are there. And now here’s an opportunity where look, if you could buy some Comcast, Wells Fargo, Intercontinental Exchange that owns the New York Stock Exchange, Nike, Walt Disney, Salesforce, Veeva Systems, companies that you’ve heard about, some companies that you haven’t heard about, but also meaningful ownership in companies that are outside of the Magnificent Seven as you’re going forward. Sounds right to me.
Intensification in Companies
Chuck Jaffe: Yes. And at the same time, you said companies that you haven’t heard of. Most people are going to have heard of these companies, because to be a wide moat company, you have to have been successful. You have to be at a spot where you built that competitive advantage. And that’s not particularly saleable, which is the basic concept of moats. So do you worry at all as much as, maybe not the S&P 500, but large-cap names in general? If somebody’s got a plain vanilla growth fund, they’re not getting much diversification here. They’re getting more intensification like you get these stocks in bigger holdings. Is that OK?
Tom Lydon: Well, intensification in companies that are outside of those mega-cap companies. I think diversification is key and critical. And especially why we continue to see large caps outperform small-caps, outperform midcaps. And those areas are fairly substantially below their trend lines. If you want to be a trend follower or if you are a trend follower, this might be one of those ETFs that you take a look at.
More importantly, if you’ve got a high concentration in the S&P 500 or high correlation of mutual funds or indexes or individual stocks in your portfolio that look and smell and feel like the S&P 500, this is a way to also participate in other companies in a more meaningful way where you’re not weighted so heavily in just a few names.
Closing Thoughts
Chuck Jaffe: It’s MOAT, M-O-A-T, the VanEck Morningstar ETF, the ETF of the Week from Tom Lydon, who is by the way, spending most of this week at the Schwab Impact Conference in Philadelphia. Tom, thanks so much for joining me. We’ll talk to you again soon.
Tom Lydon: Thanks Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe, and yeah, that’s me. If you want to learn all about my hour-long weekday podcast, go to moneylifeshow.com or search for it wherever you find great podcasts.
To learn more about investing in exchange traded funds, make sure you check out Vettafi.com. The website has a great suite of tools that will help you be a better investor. They’re on Twitter @Vetta_Fi, and Tom Lydon, their vice chairman, my guest, well, he’s on Twitter too. He is @TomLydon. The ETF of the Week is here for you every Thursday. Make sure you don’t miss anything by following along on your favorite podcast app. Until we do this again, happy investing, everybody
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