One of the most common bits of investing advice is to ‘look for companies with competitive advantages’. Is the VanEck Morningstar Wide Moat ETF (ASX: MOAT) the best way to do that?
What’s an investing moat?
First of all, what do we mean when we talk about a ‘wide moat’?
The moat concept in investing is all about sustainable competitive advantages.
Think about a big medieval castle with the classic big moat around it, preferably filled with crocodiles. The purpose of a moat around a castle is to protect it, and give the inhabitants an advantage over their attackers.
An investing ‘moat’ is exactly the same. It’s a competitive advantage that a company has over its rivals. The wider the ‘moat’, the stronger and more sustainable the advantage is. To give an example, you could say a company like WiseTech Global Ltd (ASX: WTC) has a wide moat. Its logistics software is used by almost all of the largest global freight forwarders and logistics providers in the world, and the cost of switching is high. If you’ve built your freight company around the CargoWise platform, it’s going to be expensive, disruptive, and risky to change providers.
The moat ratings are assigned by Morningstar, and switching costs are one of the main things they look for when determining a company’s moat.
Other important factors are network effects, intangible assets, cost advantages, and economies of scale in sectors that can only support one or a few companies.
Another good example of a wide moat is Alphabet Inc (NASDAQ: GOOGL). Alphabet is the parent company of Google and one of the larger holdings in the MOAT ETF.
Google has very strong network effects, with the value of its products and services growing as more people use them.
Think of Youtube. The more people there are on Youtube, the more videos get made and the better the quality, which means more people then come to the platform to watch those videos. It’s essentially a snowball effect.
The MOAT ETF
The VanEck MOAT ETF has latched onto this idea of moats and competitive advantages and turned it into an ETF.
MOAT holds a portfolio of around 50 US companies with ‘wide moat’ Morningstar ratings. It follows an equal-weight approach, allocating around 2% to each company rather than weighting by market cap.
The MOAT ETF is fairly well diversified across sectors. It’s currently made up of about 25% healthcare companies, 22% tech, 18% industrials, 14% consumer staples, plus a spread of smaller allocations.
The thinking goes that if you can find the companies with the biggest advantages, sustainable returns should follow.
A quick glance at the past performance shows they might be onto something. The MOAT ETF listed in June 2015 and has returned 15.01% per year since then.
So, should you buy it?
There’s no disputing that the MOAT ETF has delivered great returns over the last 10 years. However, it’s worth comparing it to the broader market.
The S&P 500 Index over the same period has returned 14.35% per year, and it has outperformed MOAT over 1, 3, and 5 years.
You also pay more for the MOAT ETF because of its more active approach and filtering. MOAT charges a management fee of 0.49% per year compared to, say, the iShares S&P 500 ETF (ASX: IVV) charging 0.04% per year.
Final thoughts
In short, I think the MOAT ETF is one of the highest quality ETFs on the ASX, and I would be happy to own it. But, I’m not totally convinced it’s any better than just holding an S&P 500 index.
Maybe the equal weighting has held it back over a period where the FANG stocks have driven the majority of S&P 500 returns? Maybe MOAT will perform better in a suppressed market because quality will become more important?
I’m not sure.
So, if I were to add it to my portfolio today, it’d be as a small satellite holding, not a core allocation. For me, low-cost index investing still wins out long-term.
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