Wide Moats Equal Big Quality | ETF Trends

Advisors looking to harness the potency of quality stocks should consider the benefits of wide moat investing. This style lends itself to an elevated quality profile.

Rather than scouring the equity universe in search of wide moat names, advisors can leverage exchange traded funds, such as the VanEck Morningstar Wide Moat ETF (MOAT) and the VanEck Morningstar SMID Moat ETF (CBOE: SMOT), for efficient access to baskets of stocks with the wide moat designation.

On VanEck’s upcoming webcast, VanEck director of product management Brandon Rakszawski and Andrew Lane, Morningstar director of equity research — index strategies — will discuss various topics related to wide moat investing and this style’s intersection with quality.

That could prove beneficial to advisors because, relative to other investment factors, quality’s definition draws more debate. However, there are some hallmarks, including earnings predictability, increasing profitability, and strong balance sheets. Often, companies with the wide moat designation, including MOAT and SMOT member firms, sport some or all of those attributes.

MOAT Ideal Avenue to Quality

The $9.52 billion MOAT debuted in April 2012 as the first ETF in the VanEck wide moat suite. Following over a decade of beating the S&P 500, MOAT remains relevant today, as highlighted by substantial 2023 inflows to quality ETFs. Additionally, systemic risk in the banking system, highlighted by multiple bank failures, is prompting money managers to revisit quality strategies.

“This is not that surprising. The S&P 500 Index is notably difficult for U.S. large-cap active managers to outperform in both strong and weak markets,” noted Rakszawski. “Therefore, logically, investors may look to index-based strategies targeting specific factors that may provide a desired return profile in the current environment. A similar thought process led low volatility strategies to become very popular in the years following the 2008 Global Financial Crisis.”

Other factors, which may be discussed on the July 12 webcast, highlight the efficacy of the quality/wide moat combination. For example, quality on a standalone basis doesn’t always perform less poorly in bear markets. Nor does it guarantee outperformance of broader benchmarks in bull markets.

Of course, there are no guarantees in investing. However, it’s possible that wide moat investing can act as enhancer to quality. This may indicate that MOAT could be a more appealing long-term idea than a standard quality factor fund. MOAT’s potential advantages are embodied in the Morningstar Wide Moat Focus Index — the ETF’s underlying benchmark.

Morningstar’s “moat framework looks out decades into the future to make that determination. Conversely, factor-based strategies will use historical inputs from a company’s balance sheet and income statement to assemble a portfolio. Morningstar has created the Morningstar Wide Moat Focus Index to capture those companies that are high quality today and expected to remain high quality many years into the future,” concluded Rakszawski.

Advisors that would like to attend the July 12 wide moat webinar can register here.

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