Wide Moat ETFs May Be Ready for a Rebound

Wide Moat stocks were first named as such by Warren Buffett, who was describing the type of businesses his Berkshire Hathaway has made a living owning for decades. Specifically, these are companies judged to have sustainable competitive advantages. That is, they are established leaders, and there is no sign of that changing. 

Wide Moat stocks can provide a sense of comfort to investors and portfolio managers. Stocks are notoriously volatile, but for some, owning a set of equities that can position themselves when times are tough is a desirable trait. While investors tend to focus on where stock prices are today, more patient types wait for the best performers to emerge.  

MOAT Versus SPY

But lately, wide moat ETFs such as the original one, the $14.5 billion VanEck Morningstar Wide Moat ETF (MOAT) have been rising, although not in relative terms. As of the end of May, MOAT’s 17% return looks fine, unless investors and advisors compare it to the 28% surge in the SPDR S&P 500 Trust ETF (SPY) over the same period.  

What is significant about that past year is that it is the single biggest underperformance in a 12-month period of MOAT versus SPY. In an era where many professional investors are judged against the mighty S&P 500 index, that could be a problem. After all, MOAT is now a 12-year-old ETF, so that dubious record is notable. 

And the short-term underperformance of these presumed long-term winners is not lost in translation. Van Eck’s non-US stock version of the wide moat theme, the Van Eck Morningstar International Moat ETF (MOTI), a $230 million fund, is just starting to rebound from its worst underperformance of the EAFE Index in its history, which dates to 2015. 

Wide Moat ETF's Potential to Lead Again 

But as opposed to ETFs driven by investment factors that are less quality-driven, moat ETFs stand a strong chance of rallying. MOAT has performed neck and neck with SPY over the past 10 years (10.6% to 10.7% annualized), a period when bigger stocks were better. That has worked to MOAT’s disadvantage, since it is an equal-weighted ETF. So, although it owns companies with a similar average market capitalization to that of SPY, it can’t ride up its biggest winners for years at a time. 

Of course, the flip side of that is MOAT’s high quality, 55 stock portfolio. While its top 10 stocks only compose 28% of the fund’s assets, it presents a more balanced sector allocation. Eight of the S&P’s 11 sectors have at least a 6% weighting in MOAT, while SPY can only claim six such sectors. This is partly due to SPY’s massive 32% technology weighting, which has in the past been a turning point for outperformance by wide moat stocks. 

Investors looking at today’s market from a contrarian angle might do well to devote some research to wide moat stocks. They are available in ETF format in large cap, small-to-mid cap and non-U.S. varieties. And those sustainable competitive advantages that create that so-called moat will likely again be as desirable to investors as any part of the global stock market.