How to Invest in VanEck Morningstar Wide Moat ETF (MOAT)

Investing in stocks with a “wide moat,” as famously endorsed by Warren Buffett, is a strategy favored by investors seeking companies with durable, long-term competitive advantages.

Today, retail investors have the opportunity to emulate this approach through various exchange-traded funds (ETFs), with the VanEck Morningstar Wide Moat ETF (MOAT -0.36%) standing out as a notable example.

In this article, we’ll explore how this ETF selects its stocks, review its holdings, highlight its historical performance, and go over other essential details that investors should consider before making an investment decision.

What is it?

What is the VanEck Morningstar Wide Moat ETF?

VanEck Morningstar Wide Moat ETF is a passive ETF that replicates the performance and holdings of the Morningstar Wide Moat Focus Index.

This benchmark selects its holdings through a process that starts by identifying companies from the broader Morningstar US Market Index.

These companies must have been assigned a “wide” economic moat rating and a “fair value” estimate by Morningstar analysts.

From this group, the smallest 3% by float-adjusted market capitalization are removed. The remaining companies are then ranked based on their “fair value ratios.”

The ETF constructs its portfolio by selecting as many as 40 companies, which are divided into two sub-portfolios. Within each sub-portfolio, the stocks are equally weighted and must adhere to sector constraints.

It undergoes a reconstitution semi-annually on a staggered quarterly schedule — one sub-portfolio is reconstituted in December and the other in June. Each sub-portfolio is also rebalanced to maintain equal weighting among the stocks.

This careful and systematic approach ensures that the ETF consistently aligns with its index criteria, focusing on companies that sustain strong competitive advantages and also trade at fair valuations.

How to invest

How to buy MOAT

Here’s a step-by-step guide on how to buy ETFs like the Wide Moat:

1. Open Your Brokerage App: Start by logging into your brokerage account. If you don’t have one, you’ll need to set one up and fund it.

2. Search for the Ticker: Enter “MOAT,” the ticker symbol for the VanEck Morningstar Wide Moat ETF, into the search bar.

3. Select the Stock: Make sure you select the stock option rather than options or other securities associated with the ETF.

4. Enter the Number of Shares: Decide how many shares you want to buy and enter that number in the “quantity” field.

5. Select Order Type:

Market Order: Choose this if you want to buy the ETF at the current market price. Your order will execute at the best available price in the market.

Limit Order: Use this to specify the maximum price you are willing to pay per share. Your order will only execute if it can be bought at your specified price or lower.

6. Review Your Order: Double-check the details of your order to ensure everything is correct.

7. Confirm and Place Your Order: Once you confirm the details, submit your order. The cash will be debited from your account, and the shares of the ETF will be credited.

Holdings of the ETF

Holdings of the VanEck Morningstar Wide Moat ETF

As of October 2024, the VanEck Morningstar Wide Moat ETF (MOAT) included 55 holdings, all of which are equally weighted at each rebalancing period. At any given time, the top holdings within this ETF tend to be the companies that have outperformed between rebalancing and reconstitution cycles.

Here are some of the notable wide moat stocks currently included in its holdings:

• Salesforce (CRM 0.91%): Leads in cloud-based customer relationship management (CRM) solutions, bolstering its competitive moat through innovation and high customer switching costs.
• Allegion Plc (ALLE -3.81%): A leading provider of security products, with significant customer retention and barriers to new competitors.
• Huntington Ingalls Industries Inc (HII -0.19%): America’s largest military shipbuilder, enjoying a secure market position due to the specialized demand and limited competition.
• Equifax (EFX 0.39%): Operates in a near-duopoly in credit reporting, leveraging extensive data assets that present a durable moat.
• Alphabet (GOOG 0.22%)(GOOGL 0.2%): Holds a dominant stance in internet search and digital advertising, benefiting from vast network effects and continuous innovation.
• Amazon (AMZN 1.08%): A giant in e-commerce and cloud computing, Amazon utilizes its size, brand, and extensive infrastructure to maintain its competitive edge.

Should I invest?

Should I invest in the VanEck Morningstar Wide Moat ETF?

Investing in VanEck’s ETF is ideal for long-term ETF investors looking to complement their core investment holdings with a “satellite” strategy.

This approach acknowledges its concentrated nature, focusing on companies identified as having wide economic moats and fair market values.

The ETF is characterized by a high active share, which means its holdings diverge significantly from the broader market indexes such as the S&P 500.

Active share is a metric used to compare the holdings of a portfolio against a benchmark; a high active share indicates that the fund’s holdings are quite different from the index, potentially offering unique advantages and risks.

Given its distinctive strategy, it might perform differently from your main market exposure, making it a valuable tool for seeking excess returns through a focused bet on high-quality companies.

For investors who already target wide-moat stocks, the Wide Moat ETF also offers a straightforward and efficient way to maintain exposure to these companies without the need for frequent manual trading or individual stock selection.

Dividends

Does the ETF pay a dividend?

The VanEck Morningstar Wide Moat ETF pays dividends, typically distributing them annually in December. As of October 2024, it boasted a 30-day SEC yield of 1.29%.

If you want a higher or more frequent dividend, you may want to consider a dedicated dividend ETF instead.

Expense ratio

What is the ETF’s expense ratio?

The expense ratio for the VanEck Morningstar Wide Moat ETF is 0.47%. This includes a management fee of 0.45% and other expenses totaling 0.02%.

For a $10,000 investment in VanEck’s ETF, this translates to an annual cost of about $47.

It’s important to note that this expense ratio isn’t paid directly out of your pocket; rather, it’s subtracted from the ETF’s returns on a daily basis, affecting the overall performance of your investment indirectly.

Historical performance

Historical performance of the VanEck Morningstar Wide Moat ETF

Here’s a look at how this ETF has performed over one, three, five, and 10-year trailing periods vs. the S&P 500 index. Figures represent total returns (price + reinvested dividends) and are up-to-date as of Sept. 20, 2024.

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The bottom line

This ETF offers investors a potential avenue to outperform the broader market, assuming you trust Morningstar’s methodology for identifying fairly valued companies with sustainable competitive advantages.

Over the past decade, the Wide Moat ETF has outperformed the S&P 500, although it has lagged behind in shorter time frames such as 1, 3, and 5 years. Other factors include its relatively high expense ratio of 0.47%, possibly because of its portfolio turnover.

As an investor, it’s crucial to be comfortable with its concentrated portfolio, typically holding between 40 and 55 stocks, and to prepare for a performance that can diverge significantly from the broader market both on a daily and longer-term basis.

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