MW This stock ETF keeps beating the S&P 500 by selecting for quality
By Philip van Doorn
The VanEck Morningstar Wide Moat ETF has been a consistent outperformer over the past 10 years
There are many approaches to building stock portfolios for the long term, but all of them require patience. And chasing last year's best performers can hurt your long-term results, as Mark Hulbert explained.
And even if you are patient, a long-term active strategy may underperform broad indexes and the exchange-funds that track them. One reason for underperformance might be that the actively managed funds have higher expenses. Another reason is that the S&P 500 has been so top-heavy, with the largest technology players dominating its performance during the bull market through 2021.
Even now, following an 18% decline in 2021, and a 4% return in 2023, the top five companies held by the SPDR S&P 500 ETF Trust $(SPY)$, which tracks the benchmark index, make up 21.3% of the portfolio. These are Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Amazon.com Inc. $(AMZN)$, Nvidia Corp. $(NVDA)$ and Alphabet Inc. $(GOOGL)$(GOOGL). (All returns in this article include reinvested dividends.)
The last four companies listed above are also held by the $7.2 billion Van Eck Morningstar Wide Moat ETF $(MOAT)$, but this fund uses a modified equal-weighted strategy as it is reconstituted and rebalanced every quarter. The fund was established in 2012. It tracks Morningstar's Wide Moat Focus Index.
Here are MOAT's returns through March 28, compared with those of SPY, over various periods:
ETF Ticker 2023 1 year Three-year average Five-year average 10-year average VanEck Morningstar Wide Moat ETF MOAT 9.1% -4.4% 19.8% 13.1% 13.2% SPDR S&P 500 ETF Trust SPY 3.8% -11.7% 17.8% 10.7% 11.8% Source: FactSet
Here's a 10-year chart of the ETFs' total returns:
During an interview, Brandon Rakszawski, director of product management at VanEck, said the Morningstar Wide Moat Focus Index reflects that firm's own research, with its analysts assigning "economic moat" ratings to companies they believe have special, long-term competitive advantages. Going further, he described the eligible universe that MOAT might invest in as a group of only about 145 companies.
The list is narrowed down for value. "A lot of investors want to own great companies, so they tend to trade at high valuations," Rakszawski said. "So the strategy tends to go toward those that are underpriced at any time."
The Morningstar analysts assign an "intrinsic value per share" for each eligible company, using a long-term discounted cash flow model. Then those values are compared with current stock prices as the index and the fund's portfolio are adjusted quarterly. The fund current holds 49 stocks.
An index such as the S&P 500 is weighted by market capitalization which means it is "rewarding success" as stocks of large-cap companies that soar can be weighted heavily. A typical equal-weighted approach to an index fund is meant to "allow smaller companies to participate," Rakszawski said. But MOAT's weighting approach is more about "allowing each stock to have its valuation dynamics play out for the portfolio," he said.
He summed up five sources of competitive advantages cited by the Morningstar analysts, as they assign economic moat ratings.
Don't miss:11 stocks in the S&P 500 expected to form an exclusive growth club for investors
-Philip van Doorn
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 01, 2023 09:20 ET (13:20 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
Comments