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Moat Investing Breakdown: What It Is And How It Helps Long-Term

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Having witnessed the once-in-a-generation whipsaw that was 2020, investors are now struggling with the most commonly asked question in investing: what’s next?

We’re coming off a decade in which high-growth tech companies like Apple, Amazon, and Facebook led the way. Yet over the last six months, the value factor has significantly outperformed growth.

So will value finally have its day or, will growth stocks continue to reign supreme?

For investors struggling with this question, there may be an answer: moat investing.

The Idea Of The Moat

The term “moat” in the context of business follows a simple premise.

The basic concept of moat investing is to choose companies that have sustainable competitive advantages that will help them fend off competition and sustain profitability into the future, ultimately creating an economic moat. These companies may not necessarily be in the trendiest industries all the time, but they could be profitable over the long term.

“Morningstar’s high conviction equity research process is differentiated in the marketplace by its consistency across sectors and its forward-looking nature,” added Brandon Rakszawski. “Their analysts identify companies that they believe can maintain competitive advantages, and therefore profitability, decades into the future.”

So how do you identify such companies? Morningstar has identified five key characteristics:

  • Switching costs - allows a company to have pricing power based on the opportunity cost of a consumer switching away from their ecosystem
  • Intangible Assets - focuses on a company’s licenses, patents, and brands
  • The Network Effect - refers to the value add as a product or service grows and expands its user base
  • Cost Advantages- a company’s ability to provide a product or service at much lower costs than any of its competitors or realize greater margins than competition.
  • Efficient Scale - can be seen in markets that are served by a limited amount of companies and make it very difficult for competition to emerge.

Valuations Equally as Important

Investing in wide moat companies alone may not lead to outperformance over all long-term periods. What has driven much of Morningstar’s moat investing success has been its focus on valuations. Allocating to wide moat companies that appear attractively valued allows investors to potentially take advantage of market mispricing as investors realize the true fair value of wide moat stocks over time.

Over the long term, the approach of targeting companies with economic moats and attractive valuations have outperformed the S&P 500 index.

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Source: VanEck as of 12/31/20

Investing In ‘Moat Companies’

Moat investing can seem complicated to the average investor, trying to select companies that fit the basic criteria. Fortunately, however, accessibility to the advantages of this strategy can be found in a widely accessible ETF, the VanEck Vectors Morningstar Wide Moat ETF (Cboe: MOAT).

MOAT tracks the performance of the Morningstar Wide Moat Focus Index, which itself is comprised of U.S.-based companies with economic moats that simultaneously trade at valuations deemed attractive by Morningstar.

Since its inception in 2012, MOAT has delivered over 15% average annualized returns, outperforming the S&P 500 by over 100 basis points, annually.1 For standardized performance as of the most recent month end please visit vaneck.com/moat

Part of that outperformance may come from the dynamic nature of the index. For example throughout 2020, Morningstar shifted away from expensive growth companies into more defensive sectors like aerospace and financials. That rotation has benefited the recent outperformance of value stocks over growth.

As of March 23, 2021 MOAT consisted of 49 holdings with a relatively equal weighting to the information technology, financial, and health care sectors. In all, every sector except for real estate is represented in the fund.

Top holdings as of 4/14/21 include 2.94% Wells Fargo (WFC), 2.71% Alphabet (GOOGL) and 2.68% Intel Corp (INTC).

Important Disclosures:
Past Performance is not a guarantee of future results. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in the ETF, please click here.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

An investment in the Fund may be subject to risks which include, among others, investing in equity securities, consumer discretionary, consumer staples, financials, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.

The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

The Morningstar® Wide Moat Focus IndexSM consists of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar. The S&P 500 Index consists of 500 widely held common stocks.

Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.

 

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus , which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.

 

1As of 2/28/21. https://www.vaneck.com/us/en/investments/morningstar-wide-moat-etf-moat/performance-distributions

 

 

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