VanEck has expanded its suite of US-listed ‘Wide Moat’ ETFs with two new funds focused on US equities exhibiting either value or growth characteristics.

Wide moats are significant structural competitive advantages that have the potential to provide long-term above-average returns.

The VanEck Morningstar Wide Moat Value ETF (MVAL US) and VanEck Morningstar Wide Moat Growth ETF (MGRO US) have been listed on Cboe BZX Exchange, each with an expense ratio of 0.49%.

The term ‘economic moat’ was coined by Warren Buffett and refers to the ability of a firm to maintain a significant market share and protect its long-term profits. This could be through brand loyalty, cost advantages, intangible assets, economies of scale, or regulatory protection, for example.

Companies possessing a Wide Moat are generally considered favorable for investors due to the expectation that these entities will sustain their profitability and market dominance over an extended period. To be designated as Wide Moat, a corporation must demonstrate the potential to preserve its competitive edge for a minimum of two decades, as assessed by equity research analysts at Morningstar.

Furthermore, the VanEck Wide Moat strategy incorporates valuation considerations, selectively allocating to firms that are deemed to be trading at advantageous valuations in comparison to Morningstar’s fair value estimates.

The strategy has demonstrated its effectiveness by surpassing the performance of major US equity benchmarks. Specifically, the index that serves as the foundation for the $15 billion VanEck Morningstar Wide Moat ETF (MOAT US), VanEck’s flagship Wide Moat US equities ETF, has achieved an annualized return of 13.70% over the past ten years. This return exceeds that of the S&P 500, which posted an annual return of 12.70% during the same timeframe (data as of 29 February 2024).

With the launch and MVAL and MGRO, VanEck is bringing the Wide Moat strategy to style-focused investors for the first time.

Brandon Rakszawski, Director of Product Management with VanEck, commented: “Investors and advisors have embraced the Moat-focused approach to identifying quality companies trading at attractive valuations, and today we’re excited to extend that approach with the launch of MVAL and MGRO. These Moat-focused ETFs allow investors to fine-tune their portfolios toward distinct style exposures while maintaining a focus on valuations.”

Rakszawski added: “Since its introduction, MOAT has, at various points, leaned more towards growth than value and vice versa. Now, with the addition of MVAL and MGRO, investors have a more complete moat-focused toolset to allocate to the exposures that they believe are best positioned for potential outperformance. Being a mega-cap company doesn’t always equate to having a wide economic moat, so for investors who are looking for growth strategies but are concerned about overconcentration among a handful of names in traditional passive growth ETFs, MGRO may be worth a closer look.”

Methodology

MVAL and MGRO are linked to the Morningstar US Broad Value Wide Moat Focus Index and Morningstar US Broad Growth Wide Moat Focus Index, respectively.

Each index originates from the Morningstar US Market Index universe, encompassing stocks that represent the top 97% of the investable market in the United States. Morningstar’s assignments of value and growth styles are supported by a comprehensive ten-factor model that integrates both retrospective and prospective metrics. This model primarily identifies companies with ‘Pure Style’ scores (entities distinctly aligned with either value or growth orientations) and those with ‘Blended Style’ scores (firms exhibiting characteristics of both value and growth).

Securities possessing a Pure Style score contrary to an index’s focus are excluded from consideration. For example, stocks classified as pure value are ineligible for inclusion in the Morningstar US Broad Growth Wide Moat Focus Index, while pure growth stocks are similarly excluded from the Morningstar US Broad Value Wide Moat Focus Index.

Upon establishing the eligible universe for each index, the methodology proceeds to pinpoint companies that have been awarded a ‘Wide Moat’ rating by Morningstar analysts, indicating a durable competitive advantage.

The Morningstar Wide Moat methodology focuses on five key sources of competitive advantage. These include network effects (the increase in customer value as more customers use the service), intangible assets (including brand loyalty, patents, and regulatory licenses), cost advantages (which allow firms to undercut potential rivals), switching costs (the expense of money or time borne by customers who wish to switch providers), and efficient scale (whereby natural positioning or sunken infrastructure costs deter new firms from entering the market).

From within these universes of style-oriented, Wide Moat companies, each index selects 30 constituents, choosing those firms that are trading at the most attractive valuations relative to Morningstar’s estimate of fair value.

Constituents are initially equally weighted and then adjusted for a style tilt that relatively increases the weight of companies with purer style exposure. The process also incorporates sector caps at a maximum of 40% or 10% above a sector’s weight in the initial style-oriented universes, whichever is greater.

Reconstitution and rebalancing occur each quarter utilizing a staggered schedule as well as buffer rules to limit unnecessary turnover.