This ETF Beats The Market

Economic Moats as an Asset Class

Dear Investor,

there are many ways to skin a cat and many ways to play the Wall Street game.

In two previous articles, I introduced you to a simple timing strategy that is based on the 200-day-simple-moving-average.

Decades of Dominance: The Investing Strategy That Almost Never Loses

This Strategy Never Lost in 33 Years

Unfortunately, most financial bloggers focus too much on just buying the S&P 500 SPY 0.00%↑ because “the market goes up” and are ignoring dozens of other approaches that can help you outperform the market and reduce the overall risk.

The goal of this newsletter is to educate you on the sheer amount of possibilities that you have by:

• Knowing where to look for stocks

• Understanding what drives returns

• Avoiding the wrong stocks

• Implementing a tactical approach to investing instead of “Should I buy this stock?”

• Learning to view investing as a game of probabilities where you bring the odds on your side and being wrong won’t impact your overall performance too much.

In today’s article, I’m going to introduce you to one of the few ETFs that was able to beat the S&P 500 SPY 0.00%↑ since its inception:

The VanEck Morningstar Wide Moat ETF MOAT 0.00%↑

Morningstar identifies five primary types of economic moats that companies can possess, each representing a different source of competitive advantage. These economic moats are as follows:

1. Intangible Assets Moat: Companies with an intangible assets moat possess valuable intellectual property, brand recognition, patents, trademarks, or other intangible assets that set them apart from competitors. These assets create barriers to entry for new players trying to replicate their products or services, giving the company a competitive edge.

2. Switching Costs Moat: A switching costs moat occurs when customers face significant costs or difficulties in changing from one product or service provider to another. Companies that have high customer switching costs benefit from a loyal customer base, as customers are less likely to switch to competitors even when alternative options are available.

3. Network Effect Moat: A network effect moat is when the value of a product or service increases as more people use it. In other words, the more users a network has, the more attractive and useful it becomes to new users, creating a virtuous cycle of growth. Social media platforms and online marketplaces are classic examples of companies benefiting from network effects.

4. Cost Advantage Moat: Companies with a cost advantage moat can produce goods or services at lower costs than their competitors. This cost efficiency enables them to offer competitive prices while maintaining healthy profit margins, making it challenging for rivals to match their value proposition.

5. Efficient Scale Moat: An efficient scale moat occurs when a company is operating in a niche market where it has achieved an optimal size and scale. In such cases, increasing the company's size further may not result in significant cost savings or benefits. As a result, new competitors may find it difficult to enter the market and compete effectively because doing so would not pay off as it would in a scalable market.

It's important to note that companies can have multiple economic moats simultaneously, which further strengthens their competitive advantage and long-term sustainability.

Morningstar distinguishes between three types of moats: wide, narrow, and none. A wide moat is typically a competitive advantage that is so robust that even a few years of poor management cannot destroy it. A narrow moat is advantageous, but it can be rapidly eroded by competition or economic shifts. And companies with no moats have no way to stop competitors from entering their market (usually the high-flyers during market euphoria).

Wide and narrow moat ratings represent Morningstar's belief that a company may maintain its advantage for at least 20 years and at least 10 years, respectively.

The holdings of the MOAT ETF are considered as having a wide moat, and are added to the portfolio when they are trading at the lowest current market price to fair value ratios (according to Morningstar’s research team and their valuation methods).

The fund gets re-balanced twice a year based on the status of a company’s moat or its valuation (If a company is overvalued it gets replaced by a cheaper one, even if the economic moat is still intact).

The MOAT ETF charges a modestly high 0.46% expense ratio, which is higher than most low-cost ETFs but seems reasonable when considering its long-term performance.

Track Record

What’s impressive is that the fund has outperformed the S&P 500 SPY 0.00%↑ during different timeframes:

While most investing strategies work better or worse during different market environments and timeframes, the MOAT ETF has shown that, over the long-run, investing in companies with wide economic moats has been proven to be very lucrative.

The fund outperformed the benchmark by a wide margin during a 1/3/5/10-year period. Not only has the index outperformed, the truly remarkable thing is the consistency of MOAT's outperformance.

Current Holdings And Sector Allocation (as of 06/16/2023)

An Unusual Way to Benefit From This ETF

The usual way would be to simply buy the fund and let time do the rest. Considering that the ETF consists of quality companies and has an amazing track record, it’s not the worst option and looks like a great addition to a diversified portfolio.

What else?

Applying my core philosophy of fishing in the right pond.

You can use this fund to pick single stocks from it in the same way you can use the list of Dividend Achievers to find future Dividend Aristocrats.

Since you’re already fishing in a pre-approved pond that has shown great performance over the long run, chances are high that you’ll pick a good stock and low that you’ll pick giant losers that will drag your portfolio down.

It’s also a huge time-saver in your research process.

Until the next issue. 👋

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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.