VanEck rolls out two new ‘Wide Moat’ ETFs in Europe

Jan 19th, 2024 | By | Category: Equities

VanEck has introduced new ‘Wide Moat’ strategies to Europe with the launch of two ETFs targeting US equities.

VanEck rolls out two new ‘Wide Moat’ ETFs in Europe

Economic moats refer to firms with long-term structural competitive advantages, whether through cost advantages, regulatory protection, natural positioning, or brand loyalty.

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.

The new funds include the VanEck Morningstar US Wide Moat UCITS ETF, which scours the entire US market capitalization spectrum to select attractively priced companies that possess economic moats, according to research conducted by Morningstar’s analysts.

The fund comes with an expense ratio of 0.46% and has been listed on London Stock Exchange in US dollars (MOTU LN) and pound sterling (MOTV LN) as well as on Xetra in euros (WMOT GY).

The second listing, meanwhile, is the VanEck Morningstar US SMID Moat UCITS ETF which applies the same investment approach but focuses on stocks of US small and mid-cap companies. The fund is also listed on LSE in US dollars (SMOT LN) and pound sterling (SMTV LN) as well as on Xetra in euros (SMTV GY). Its expense ratio is 0.49%.

VanEck offers a further two Wide Moat ETFs in Europe.

The $500 million VanEck Morningstar US Sustainable Wide Moat UCITS ETF (MOAT LN) delivers the same strategy as MOTU but excludes companies deriving revenues from weapons and thermal coal as well as firms with higher levels of ESG- and carbon-related risks. The fund, which has an expense ratio of 0.49%, is classified as Article 8 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).

The $60m VanEck Morningstar Global Wide Moat UCITS ETF, meanwhile, delivers Morningstar’s Wide Moat strategy on a global scale. Its expense ratio is 0.52%.

Methodology

The new listings, MOTU and SMOT, are linked to the Morningstar Wide Moat Focus Index and the Morningstar US Small-Mid Cap Moat Focus Index, respectively. Each index screens its applicable starting universe to identify companies with a ‘Wide Moat’ Morningstar analyst rating.

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 – eBay being a good example), 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).

Notably, the Morningstar US Small-Mid Cap Moat Focus Index then conducts a momentum screen that removes 20% of the remaining Wide Moat companies with the lowest share price performance over the past year. The Morningstar Wide Moat Focus Index, in contrast, does not conduct this momentum-based filter.

The Morningstar Wide Moat Focus Index and Morningstar US Small-Mid Cap Moat Focus Index then select 40 and 75 constituents, respectively, choosing those firms that are trading at the most attractive valuations relative to Morningstar’s estimate of fair value.

Constituents are equally weighted in the indices, although reconstitution and rebalancing occur on a staggered schedule, meaning the funds are likely to always hold stocks with varying weights.

In economic theory, the competitive advantages attributable to moats are generally eroded over time. A firm with a competitive advantage often earns significant profits, encouraging new firms to enter the market and reducing the firm’s dominant position.

The indices’ regular rebalancing, however, helps to eliminate firms whose dominant position is deteriorating, thereby maintaining the advantageous qualities offered by economic moat firms.

Commenting on the new listings, Martijn Rozemuller, CEO at VanEck Europe, said: “With its careful stock selection, the Morningstar Wide Moat Focus Index has historically outperformed the broad US equity market over longer periods. Our VanEck Morningstar US Wide Moat UCITS ETF is therefore a good fit as the core component of a US position in a portfolio, particularly for long-term investors. We believe that the outperformance will continue – but of course, we can’t guarantee it.”

Rozemuller continued: “In comparison to large-cap stocks, small and mid-cap stocks have historically often outperformed. Although such small and mid-cap stocks make up a considerable proportion of the US equity market, they are frequently underweighted in portfolios. The VanEck Morningstar US SMID Moat UCITS ETF can therefore be an excellent way for investors to diversify their portfolio more broadly. At the same time, they can benefit from the higher long-term yield potential and the more sustainable competitive advantages of the small-cap shares identified by Morningstar.”

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