Building a resilient portfolio requires a strategic approach that goes beyond chasing market trends or high-performing stocks. The concept of an economic “moat” - a term Warren Buffett popularized - refers to a company's durable competitive barriers that protect its market position and profits from competitors, much like medieval castles used moats as defensive barriers.
With corporate sector fundamentals showing robust health and Q3 2024 earnings growth exceeding expectations beyond just mega-cap companies, the focus on sustainable competitive advantages has gained renewed attention. This strategic approach becomes particularly compelling as analysts anticipate a slower shift toward a lower interest rate environment, potentially benefiting companies with strong economic moats.
In the current economic landscape, companies with wide economic moats have maintained their market leadership positions while generating superior returns on invested capital. Exchange-traded funds (ETFs) can offer a simple way for investors to tap into this kind of broad theme - and for those looking to zero in on the upside in companies with sustainable competitive advantages, one ETF in particular stands out for its focused strategy on stocks with strong economic moats.
Overview of the MOAT ETF
The VanEck Morningstar Wide Moat ETF (MOAT) stands as a testament to strategic portfolio construction, tracking the Morningstar Wide Moat Focus Index since its inception in April 2012. Under VanEck's stewardship, this fund has grown to command $16.1 billion in managed assets, with a competitive management fee of 0.46%.
The fund's strategy employs a rigorous two-step selection process. First, it identifies companies with sustainable competitive advantages from the Morningstar US Market Index, which represents 97% of U.S. market capitalization. These advantages must stem from at least one of five sources: network effects; cost advantages; efficient scale; intangible assets; or high switching costs.
Second, the strategy selects approximately 40 of these companies trading at the largest discount to their fair value, using Morningstar's proprietary valuation model. The portfolio undergoes quarterly rebalancing to ensure continued alignment with these criteria, while maintaining strict diversification requirements across sectors.
This methodical approach has delivered relatively cautious returns in the 2024 market environment, with the fund posting a 24.7% return over the past 52 weeks, and rising 14.8% on a year-to-date basis. MOAT also distributes an annual dividend of $0.73, yielding 0.77%.
The current portfolio includes familiar names, with technology leader Salesforce (CRM) leading at 3.14%, healthcare giant Bristol-Myers Squibb (BMY) at 2.94%, software innovator Autodesk (ADSK) at 2.92%, automation solutions specialist Emerson Electric (EMR) at 2.92%, and biotechnology firm Gilead Sciences (GILD) at 2.90%.
Each holding undergoes continuous monitoring to ensure it maintains its competitive advantage and attractive valuation characteristics. The portfolio maintains sector diversification limits of 40% and individual position caps of 10%, though typical positions range between 2% and 3%.
Building a MOAT
Market dynamics in late 2024 have created a particularly favorable environment for companies with strong economic moats. The Federal Reserve's November decision to cut rates by 0.25% to 4.5-4.75%, its second reduction this year, signals a shift that benefits established market leaders. Companies with sustainable competitive advantages are now better positioned to leverage lower borrowing costs while maintaining their market dominance.
Trump's electoral victory has introduced significant implications for MOAT's holdings. His proposed corporate tax policies, including lowering the corporate tax rate and introducing new manufacturing incentives, particularly favor the fund's industrial sector holdings.
However, with some of the president-elect's policy proposals also expected to have an inflationary effect, that could translate to fewer and more gradual rate cuts from the Fed. If rates stay elevated amid stubborn price pressures for already strapped consumers, that economic backdrop could favor wide-moat companies quite a bit.
Notably, Goldman Sachs Asset Management's Whitney Watson sees another quarter-point cut likely in December, though emphasizes that strong economic data could influence the timing. Separately, Santander's Q4 2024 outlook suggests that companies with solid fundamentals and established market positions are better positioned to navigate the increased volatility typically associated with election periods, particularly when backed by clear competitive advantages and sustainable business models.
Conclusion
The VanEck Morningstar Wide Moat ETF presents a compelling case for quality-focused portfolio construction. Its methodical approach to identifying companies with sustainable competitive advantages has proven effective, particularly in 2024's market. With strong performance metrics, a balanced portfolio of market leaders, and positioning that aligns well with current economic trends, this ETF demonstrates the enduring value of Warren Buffett's moat philosophy - and could add a margin of defense to portfolios heading into 2025.
