In my opinion, VanEck Morningstar Wide Moat ETF (ASX: MOAT) is one of the best possible ETFs for investors to choose.
Why I like MOAT ETF
For starters, let’s talk about what it actually is.
The idea of this investment is that it “gives investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team.”
Being diversified is a good feature. Investments that are nicely valued is an attractive feature. Sustainable competitive advantages is a strong feature.
Diversification
There are a few different ways to think about diversification.
One can consider the number of different holdings, whether it mitigates ‘concentration risk’. Having one investment go bad in a portfolio is a different proposition if you have three holdings compared to 100 holdings. MOAT ETF currently has 50 holdings (and holds at least 40).
Another factor to consider is geographic diversification. All of the businesses in this portfolio are listed in the US. However, the underlying earnings of those businesses probably come from across the world. Names like Alphabet (Google) and Microsoft earn revenue from almost every country in the world.
The final diversification element I like to think about is sector diversification. Having all your portfolio come from the financial sector or resource sector isn’t very diversified. There are five industries that have an allocation of more than 10% in the MOAT ETF: healthcare (20.3%), IT (16.6%), industrials (15.4%), financials (13.3%) and consumer staples (11.1%).
Attractive value
The investments in the VanEck Morningstar Wide Moat ETF are believed to be trading at attractive prices according to Morningstar’s estimate of fair value.
What’s fair value? It’s the analysts’ thoughts on what a fair price for that business is. For example, $20 for a kilo of apples would be very expensive, but $0.20 would be very cheap. Around $5 could be a fair price. If apples were $2.50 per kilo at the supermarket, you might want to add them to your portfolio.
That’s what is happening within the MOAT ETF. Analysts are saying these businesses are good value. Businesses are moved out of the portfolio if they aren’t good value, according to the Morningstar analysts.
Sustainable competitive advantages
The ETF only wants to own businesses that have a wide economic moat, which (according to Morningstar, means the business can generate positive economic profits for shareholders over an extended period of time, for 10 years and perhaps up to 20 years. In addition, there must not be any substantial threat of major value destruction.
After rating 1,500 companies, what remains are the wide moat/sustainable competitively advantaged businesses.
In the current portfolio are names like Compass Minerals, Alphabet, Microsoft and Kellogg.
The returns
Investment returns can’t be known, but I think the above methodology is an important factor in the MOAT ETF delivering net returns of 17.9% per year over the last three years, though I’m not expecting the next three years to be as good as the last three years.
