The VanEck Morningstar Wide Moat ETF (ASX: MOAT) has been a high-performing fund for several years. An exchange-traded fund (ETF)'s performance is decided by the underlying companies' returns, so how the portfolio is constructed is important.
Since its inception in June 2015, the ASX ETF has delivered an average annual return of 15.3%, compared to 14.1% for the S&P 500 Index (SP: .INX) over the same time period.
While the holdings within the ETF do steadily change, the portfolio is always focused on solid businesses with excellent economic moats that are expected to endure and succeed for many years.
Companies inside the MOAT ETF
The VanEck Morningstar Wide Moat ETF looks to invest in a portfolio of at least 40 "attractively priced US companies with sustainable competitive advantages", according to Morningstar's equity research team.
It currently has 54 holdings across a range of industries. The biggest position in the portfolio right now (with a 3.47% allocation) is Teradyne, and the smallest positions, both with a weighting of 1.04%, are Adobe and Fortinet. There are numerous holdings with a position size of at least 2.25%, which are as follows:
- Teradyne (3.47%)
- Alphabet (3.22%)
- International Flavors & Fragrances (3.06%)
- Rtx (2.99%)
- Tyler Technologies (2.79%)
- Charles Schwab (2.73%)
- Altria Group (2.64%)
- Corteva (2.64%)
- Biogen (2.51%)
- Pfizer (2.48%)
- Transunion (2.45%)
- Allegion (2.43%)
- Campbell Soup (2.42%)
- Medtronic (2.38%)
- Equifax (2.35%)
- Agilent Technologies (2.31%)
- US Bancorp (2.28%)
As we can see, the position size is quite evenly distributed, which reduces the risk of being overconcentrated in any particular stock.
How are stocks selected?
Businesses are only chosen for the MOAT ETF portfolio if they are trading at an attractive price relative to Morningstar's estimate of fair value. In other words, they only buy a stock if they think it's much cheaper than they believe it's actually worth.
The analysts assign an economic moat rating to each of the approximately 1,500 companies under its coverage. For Morningstar, this is where a company has a sustainable competitive advantage that allows it to generate positive earnings for shareholders over an extended period. Only 14% of the companies monitored have a "wide moat" rating.
To earn a wide moat rating, analysts think that the company's "excess normalised returns must, with near certainty, be positive ten years from now. In addition, excess normalised returns must, more likely than not, be positive 20 years from now."
There are several different types of moat, including cost advantage, intangible assets (patents, brands, regulatory licenses), switching costs, network effects, and efficient scale.
The investment style seems to be working well – in the five years to 31 May 2024, the MOAT ETF has delivered an average return per annum of 16.2%. Of course, past performance is not a guarantee of future performance.
