The VanEck Vectors Morningstar Wide Moat ETF (MOAT) is an example of an exchange traded fund with plenty of perks, some of which might catch investors by surprise.
It’d be reasonable to expect that companies with wide competitive moats would be somewhat pricey on valuation. After all, there are no free lunches in financial markets, and accessing companies with deep competitive advantages has a cost.
However, some members of the Morningstar Wide Moat Focus Index — MOAT’s underlying index — have a value feel today. In addition, some MOAT member firms offer investors buffers against rising inflation, which is an issue on many investors’ minds these days.
“Valuations for companies with wide economic moat ratings are more attractively valued than those with narrow or no moat ratings,” says Morningstar analyst Dave Sekera. “Morningstar’s Wide Moat Focus Index has outperformed the broad market this year, and we continue to see value in high-quality companies relative to the market. Although, valuation in the value category is low enough that many of those with narrow or no moat ratings are trading at attractive valuations.”
What’s interesting about MOAT’s value positioning is that it’s not heavily allocated to the traditional value sectors. Economically sensitive technology and defensive healthcare combine for almost 45% of the ETF’s weight. Conversely, financial services — prime value territory — is merely MOAT’s fifth-largest sector exposure at 6.5%.
As for inflation-fighting power, MOAT has that, too. Consider the following: One of the primary elements of a wide moat enterprise is switching costs. As in, clients will encounter costs in moving away from the wide moat firm’s products and services.
Whether those costs arrive in the form of lost cash or lost time, they are not attractive, meaning that clients want to avoid switching costs. One way of looking at this is that wide moat companies have pricing power — an essential trait in helping investors survive and thrive in inflationary climates.
“While we continue to forecast that inflation will moderate in 2022, we expect that wide-moat companies are generally better positioned to pass through cost increases if inflation persists. Additionally, we would expect wide-moat stocks to hold their value better during any potential market corrections,” adds Sekera.
Examples of industries where switching costs works in favor of companies include communication services, healthcare, and technology — a trio combining for 51% of MOAT’s lineup.
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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.
