Moat Stock Selection Drowns Out Factors
Moat investing is based on a simple concept: Invest in companies with sustainable competitive advantages trading at attractive valuations.
Economic moats are sustainable competitive advantages that are expected to allow companies to fend off competition and sustain profitability into the future. Morningstar has identified five sources of economic moats.
Switching costs give a company pricing power by locking customers into its unique ecosystem. Beyond the expense of moving, they can also be measured by the effort, time, and psychological toll of switching to a competitor.
Example: Stryker Corp.
Though not always easy to quantify, intangible assets may include brand recognition, patents, and regulatory licenses. They may prevent competitors from duplicating products or allow a company to charge premium pricing.
Example: Starbucks Corp.
A network effect is present when the value of a product or service grows as its user base expands. Each additional customer increases the product’s or service’s value exponentially.
Example: Visa Inc.
Companies that are able to produce products or services at lower costs than competitors are often able to sell at the same price as competition and gather excess profit, or have the option to undercut competition.
Example: Walmart Inc.
In a market limited in size, potential new competitors have little incentive to enter because doing so would lower the industry’s returns below the cost of capital.
Example: Union Pacific Corp.
Morningstar’s equity research team of more than 100 analysts covers over 1,500 companies globally. More than 200 asset managers and 75,000 financial advisors rely on Morningstar’s research. All of Morningstar’s equity analysts follow a single, consistent research methodology.
Analyst conducts company and industry research, which may include financial statement analysis, trade show visits, industry reports, site visits and conference calls.
Analyst assesses the strength of the company’s competitive advantage, or moat, assigning a rating of None, Narrow, or Wide.
Analyst considers past financial results, competitive position, and future prospects to forecast the company’s cash flows. Assumptions are entered into proprietary discounted cash flow model.
Using Morningstar’s proprietary discounted cash flow model, the analyst develops a Fair Value Estimate, which represents the intrinsic value of that company.
Identify companies with sustainable competitive advantages and attractive valuations.
Applying Morningstar’s moat investing philosophy to U.S. companies has historically generated excess returns relative to the broad U.S. equity markets. Strong stock selection has been a primary driver of excess returns since 2007 for this long-term, core investment strategy.
2/14/07 - 9/30/21
Source: Morningstar. Past performance is no guarantee of future results. Index performance is not representative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com. Investors cannot invest directly in the Index.
Leverage Morningstar’s forward-looking moat investment philosophy across global equity markets.
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Fair value estimate: The Morningstar analyst’s estimate of what a stock is worth.
Morningstar Wide Moat Focus Index consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are the most attractively priced, according to Morningstar. Morningstar Global ex-US Moat Focus Index consists of international companies identified as having sustainable, competitive advantages and whose stocks are attractively priced.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Global ex-US Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 50 stocks to at least 50 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.
The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
The Morningstar® Wide Moat Focus indexSM, Morningstar® Global ex-US Moat Focus indexSM, and Morningstar® Global Wide Moat Focus indexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF, VanEck Morningstar International Moat ETF, or VanEck Morningstar Global Wide Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar Wide Moat Focus Index, Morningstar Global ex-US Moat Focus Index, and Morningstar Global Wide Moat Focus index are service marks of Morningstar, Inc.
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An investment in the VanEck Morningstar Wide Moat ETF (MOAT®), VanEck Morningstar International Moat ETF (MOTI®), VanEck Morningstar Global Wide Moat ETF (MOTG™) and VanEck Morningstar Wide Moat Fund, (the "Funds") may be subject to risks which include, among others, investing in the health care, consumer discretionary, consumer staples, industrials, telecommunications, information technology, financial services, medium-capitalization companies, equity securities, market, operational, high portfolio turnover, index tracking and data, emerging market issuers, special risk considerations of investing in Chinese, European and Asian issuers, depositary receipts, cash transactions, underlying fund, new fund, authorized participant concentration, no guarantee of active trading market, trading issues, replication management, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification, and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns.
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