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How to diversify a share portfolio?

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT) is an exchange traded fund (ETF) which seeks to replicate, before fees and expenses, the performance of the Morningstar Wide Moat Focus Index (MWMFTR). The index is intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar’s equity research team.

Excluding distributions, MOAT has risen at an annualised growth rate of 15.2% over the last 3 years, to sit at $67.80 at the time of writing.

There are now more ETFs in the United States of America than there are stocks. One reason for this is the instant diversification offered to investors, at both an industry and international level. Building a portfolio of stocks can be difficult, but is extremely important. ETFs make diversification easier, and help you to avoid a number of the unconscious biases every investor faces.

MOAT currently has exposure to quality companies such as: Amazon.com, Inc (NASDAQ: AMZN); Walt Disney Co (NYSE: DIS); Gilead Sciences, Inc (NASDAQ: GILD); and, Salesforce.com, Inc (NYSE: CRM).

MOAT’s holdings change over time, but are focussed on US companies with competitive advantages. Investors such as Warren Buffett have identified sustainable competitive advantages as a key indicator of long term outperformance. These advantages take on a number of forms and are sometimes hard to identify. They can change or be made redundant over time. Two great examples of a competitive advantage are a strong brand and network effects.

The Coca-Cola Co (NYSE: KO) has one of the most recognisable brands in the world, which is one of the reasons Warren Buffett has held the stock for so long. The company invests a lot of its marketing into maintaining the brand, as it is an intangible that makes people choose their products over their competitors.

At the time of writing Coca-Cola isn’t held by MOAT, but Facebook, Inc (NASDAQ: FB) is. Facebook’s recent and ongoing privacy and publishing concerns highlight the true power of network effects. Despite people leaving the platform, some of them have returned. Facebook is so entrenched in their lives (and importantly the lives of their friends and family) that other alternatives are inefficient financially, timewise or otherwise. This is one of the factors that has seen the stock handily outperform the market since listing in 2012.

Diversification brings peace of mind and stability to your portfolio. MOAT is a great option because of the high quality companies it holds.

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Motley Fool contributor Lloyd Prout owns shares of VanEck Vectors Morningstar Wide Moat ETF and Facebook, Inc. and expresses his own opinions. The Motley Fool Australia has recommended VanEck Vectors Morningstar Wide Moat ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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