According to Morningstar’s indexing methodology, there are five sources of economic moats: Intangible assets that include brand recognition to charge premium prices. Switching costs that make it too expensive to stop using a company’s products. Network effect that occurs when the value of a company’s service increases as more use the service. A cost advantage helps companies undercut competitors on pricing while earning similar margins. Lastly, efficient scale associated with a competitive advantage in a niche market.

“It’s a very dynamic portfolio,” Rakszawski said. “They’re trying to capture these valuation opportunities and quality companies on a regular basis, so the index team is leveraging Morningstar research to capture those top picks from their equity research team, but not overpaying.”

An investor would end up with the most attractively priced stocks among the companies that have garnered the “wide moat” rating.

“Two points that really differentiate the strategy is the performance and the process,” Rakszawski added. “Both ETF form as well as in the underlying index have outperformed not only the broad market but in many periods it’s outperform both a passive ETF and active mutual fund peers in the space.”

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