These ETFs May Help Advisors Float Their Moats

Moats are back! What does that even mean? 

Investors who have a penchant for companies with proven, enduring, sustainable competitive advantages know exactly what I’m talking about. “Wide moat stocks” are those judged to be someone immune to having their leadership challenged any time soon. That’s because they have built up one or more of the following: 

• High Switching Costs. That is, it is tough for customers to move to another competing company. Mobile phone providers have moats, to some degree. We all know it can be a cumbersome process compared to, say, switching from Coke to Pepsi. 
• Low-Cost Producer. Amazon might be the most striking example of this in modern business history. Try competing with that delivery system without massive amounts of capital, not to mention the costs to promote the business. Jeff Bezos had a dream decades ago that started by selling books online. That was not a moat, but today’s Amazon is. 
• Intangible Assets. If companies own patents, superior technology, and have people that can’t be replaced easily (such as an iconic founder), that can create a wide moat business and stock. Aerospace companies like Rockwell and Northrup Grumman come to mind. 
• Efficient Scale: Some industries have a handful of firms that seized on opportunities to create scale in their businesses, and that blunts competition. The pharmaceutical industry has several of these, including Pfizer and Bristol Myers. 
• Network Effect: Some products just become iconic, to the point where they cannot be knocked out of their leadership roles. Nike and Starbucks come to mind, as well as Campbell Soup.  

Moat ETFs Slump May Soon End 

The stock market of the past couple of years has been so narrowly focused, a few wide-moat stocks have flourished, but those outside the Magnificent Seven or the technology sector have lagged, relatively speaking. But that may be flipping around, as investors start to look for what else to buy. Many are starting to “come home” to the once-beloved wide moat stocks. 

The original and most prominent ETF in this space is the $15 billon VanEck Morningstar Wide Moat ETF (MOAT) which entered the market back in 2012. It owns 55 stocks which are evenly weighted, with no stock currently topping 2.8% of the portfolio.  

This ETF Floats Its Moat, International Style 

MOAT’s sister ETF, the $223 million Van Eck Morningstar International Wide Moat ETF (MOTI) is three years younger, owns more stocks (70-75) and at 2.2%, has nearly three times the dividend yield of MOAT. 

MOAT is having its worst run versus the S&P 500 since 2016. On a rolling three-year basis, it has trailed the benchmark by 12% in total for the past 36 months. However, the last time it was this bad for MOAT, it followed up by outperforming the S&P 500 by 15% over the next few years.  

I recently visited the Tower of London, where its vast moat is no longer needed to keep enemies away. Instead, it has become a popular place to see flowers bloom. Perhaps, with markets starting to look beyond FAANG stocks, the wide moat version of the stock market will soon bloom as well.