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Magazine Issues » October 2018


FortressAmidst a historic bull run, companies with wide economic moats continue to prosper, says asset manager VanEck.

U.S. equities have been on a historic tear since the last bear market – the Great Recession – bottomed out, and on August 22, 2018 the current bull market reached a major milestone as it became the longest bull run on record, having gone 3,453 days without registering a 20% decline. Although many different sorts of enterprises have been generating extremely robust corporate profits during these economic boom times, companies with wide “economic moats” stand to benefit even more handsomely.

But what are economic moats anyway, and what do they have to do with corporate performance? Investors are no doubt familiar with conventional moats – the defensive trenches dug around castles and filled with water in medieval times to foil invading armies and discourage attacks. Castles with wider moats were more difficult to attack than those with narrower moats.

Economic moats, then, are metaphors used to represent the competitive advantage that a company may have versus the rest of the competition in its industry. The wider the “moat”, the greater the competitive advantage that a given company enjoys. The narrower the moat, the more competitive the industry.

Naturally, only companies with specific sets of characteristics can enjoy the benefits of economic moats. These characteristics include:
     •  Intangible assets: a strong brand with high customer loyalty tends to be able to continue charging a premium for its products (and consequently experiencing higher profit margins), even though cheaper alternatives are available.
     •  Switching costs: when it is difficult or extremely costly for existing customers to switch from their existing provider to another, companies can continue to charge a premium for their products or services, even amidst robust competition.
     •  Network effect: social networks such as Facebook serve as excellent examples of this characteristic. While many alternatives to Facebook exist, its 1 billion active users present a formidable “network effect” cost to any users considering switching to another platform. The platform is useful insofar as it provides users with access to its large user base and presents a nearly insurmountable obstacle to would-be competitors.
     •  Cost advantage: companies that have managed to lower costs to a degree beyond the reach of the competition may enjoy higher profit margins even as they are able to charge significantly lower prices.
     •  Efficient scale: companies that have come to dominate niches with near-monopoly reach can also generate higher-than-usual profits as a result.

Companies with just one or even a collection of the above characteristics will tend to have wider moats and greater competitive advantages, enabling above-average profits over sustainable periods of time. As Warren Buffett put it in an interview with Fortune, “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

With Buffett’s comments in mind, it stands to reason that investors would find it advantageous to gain exposure to just such companies: those with wide economic moats and sustainable above-average profits. The VanEck Vectors Morningstar US

Wide Moat UCITS ETF (Ticker: MOAT) is constructed from the ground up to provide investors with efficient exposure to companies with wide economic moats, which can help generate sustainable, above-average profits.

In the first phase of stock selection, more than 100 analysts at Morningstar – the renowned, independent research firm – systematically screen all of the approximately 1,500 stocks contained within the Morningstar US Market Index, which accounts for 97% of U.S. stock market capitalisation.

If a company benefits from one or more competitive advantages and is deemed capable of sustaining them over the next 20 years, the stock receives a “Wide” Morningstar Economic Moat™ Rating. Currently, about 219 companies from the 1,500-stock universe have earned this rating.

From there, companies with “Wide” economic moats are further screened for fair value, utilising a proprietary assessment methodology that takes cash flow and profit estimates into account. The remaining 40 to 80 securities – representing attractively priced U.S. securities with wide economic moats – are included in MOAT’s portfolio.

Even as massive corporate profits continue to dominate headlines amidst the ongoing historic bull run, companies with wide economic moats have the best prospects of generating sustainable above-average profits over the next two decades. MOAT seeks to provide investors with transparent, efficient exposure to the 40 American companies that, thanks to their wide economic moats, stand a cut above the rest in terms of competitive advantages.

Important Disclosures: VanEck Vectors Morningstar US Wide Moat UCITS ETF is a sub-fund of VanEck Vectors® UCITS ETFs plc., organised under the laws of Ireland. Any investment decision must be made on the basis of the prospectus and the key investor information document (“KIID”), which is available at and VanEck Investments Limited at its registered office at 25-28 North Wall Quay, Dublin 1, Ireland.Morningstar® Wide Moat Focus IndexTM is a trade mark of Morningstar inc. and has been licensed for use for certain purposes by VanEck. VanEck Vectors Morningstar US Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability of investing in VanEck Vectors Morningstar US Wide Moat UCITS ETF.

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