Patrick Finn, CFA, Managing Director, ETF Business Development, VanEck, joined Keith Black, Managing Director of RIA Channel, to discuss investing in companies with wide economic moats through the VanEck Morningstar Wide Moat ETF (MOAT) and the VanEck Morningstar SMID Moat ETF (SMOT).
Morningstar defines a wide economic moat as twenty years of sustained competitive advantage. Finn explains that it is important to not only understand each firm’s competitive advantage in the past, but to also analyze what market forces could erode these competitive advantages in the future.
Morningstar has been combining both qualitative and quantitative analysis to identify quality companies for over twenty years. Two of the five qualitative factors that denote a company with strong competitive advantage are switching costs and economies of scale. Morningstar identified only 146 companies in their US equity universe of over 800 companies that qualify for this wide moat designation.
Companies included in the MOAT and SMOT portfolios are high quality companies, but the fund doesn’t necessarily lean toward companies with value or growth characteristics. This may allow the funds to be less sensitive to swings in market sentiment regarding value stocks or growth stocks.
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