VanEck Morningstar Wide Moat ETF (BATS:DITCH) is one of my favorite US large-cap diversified ETFs. It invests in companies considered to have wide moats, meaning they have, as Van Eck puts it, “sustainable competitive advantages” that set them apart from other companies. The ability to maintaining this status in both good and bad markets is an excellent approach for long-term investors. But the question now is: at what price does this commercial advantage, this wide gap, become temporarily too expensive for a new purchase. We think that’s the tough situation with MOAT, and so while we love it and would keep it if owned (I don’t have it, but have done so many times in the past), it does not receive a purchase from me. In the event of a market sell-off, this would be one of the first core stock positions I would consider, as has been the case for much of its mandate of almost 12 years.
MOAT has the same problem as the broader large-cap stock market: it is priced high.
Despite shaky market sentiment, hawkish actions by the Fed, and growing concerns about the U.S. consumer, major indexes appear to have shrugged off those concerns with strong performances. But can the party continue in 2024? As I wrote recently, this could be the case, but more likely in a year 2000 scenario, where the S&P 500 and Nasdaq 100 soar higher and then begin a slow slide. In 2000, this slow decline lasted almost three years. But the last phase of the rise, during the first nine weeks of 2000, was astonishing for the bulls. They were making money at a tremendous rate. But that was the last laugh, so to speak.
So while I’m not saying this is exactly how things will play out in 2024, I’m not willing to chase multiple premium stocks, individually or in a basket, even if they are as well constructed as MOAT. The market may have already priced in events such as interest rate hikes, but borrowing capital is and remains more expensive than a year ago. That could limit expansion initiatives by many companies if U.S. consumer demand persists as inflation subsides. And while it doesn’t impact large-moat companies as much as it does small-caps, after the market moves in 2023, the chances of them all crashing together, regardless of their size, are now high. There are many ETFs that I trade tactically, but MOAT is not one of them. When I buy it, it’s for 1 to 3 years, I hope. It therefore does not meet my entry criteria at the moment. Not with his portfolio trading at 24 times earnings.
Why MOAT is still at the top of my watchlist
This post-pandemic stock market environment makes well-positioned companies a more vital addition to an investor’s portfolio. Or, in an all-weather format, a company whose competitive advantages are strong enough to protect against competition while achieving high returns on capital for 20 years or more. This is how an economic moat is defined.
MOAT focuses on a mix of large-cap stocks held by the Morningstar Wide Moat Focus Index. Faithfully replicating these factors, MOAT seeks companies with sustainable competitive advantages and currently focuses primarily on financials, healthcare, technology, and industrials, respectively, among U.S. stocks.
With $13.3 billion in assets under management, this 50-stock, equally weighted equity ETF uses Morningstar’s forward-looking analysis covered by 100 analysts globally, resulting in a fund that combines two complete teams conducting rigorous research (Morningstar and VanEck). MOAT will travel the cap spectrum a bit, but its current weighted average market cap of $180 billion tells us that it’s primarily focused on large-cap stocks.
2024 could prove to be a challenging environment for most companies to meet their growth targets, even for some of the best ones. But a portfolio with more than 50 of these elements can be useful for investing in the face of this uncertainty. While a Vanguard portfolio would give you exposure to a broad basket of securities through a strategic allocation style, MOAT takes a more dynamic approach when it comes to company and sector rotation. The fund prioritizes individual securities within an equal-weighted portfolio construction framework, but not the sectors themselves, strategically positioning the investor in top-performing sectors within a given economic cycle.
The fund has seen significant net inflows year-to-date (around $4 billion), which is unsurprising with MOAT up 32% for 2023. This is all the more impressive given the S&P 500 is more heavily weighted in technology, this year’s best performing sector at 28%. compared to MOAT’s 20% weighting. In this case, performance attribution goes back to portfolio construction, in which the fund takes a smart beta approach relative to the S&P’s market cap-weighted portfolio.
Despite the fund’s outperformance relative to the S&P 500 so far this year, MOAT still has a relatively high correlation to the index with a coefficient of 0.94 and a beta of 1.05. With a standard deviation of 19.8, there could be risks that the fund will underperform if the S&P 500 declines. The price isn’t perfect, but it’s up there.
Price trend analysis
MOAT just completed a 3-year period in which it outperformed SPY, although we see this advantage narrowing more recently. But my biggest concern for the future is that, barring a few more years of sustained happiness in the stock markets, the 3-year annualized return of SPY and MOAT will not fluctuate within a range of 9% to 25%. Therein lies the problem with the stock ETFs I use for buying and holding purposes.
This might be hard to see if you don’t read millions of charts a week like I do, but here’s what I see below. When we replace SPY with RSP, the equal-weighted S&P 500 ETF, MOAT’s advantage widens. Translation: Given that I expect the market to lean more toward equal-weighted performance than continued mega-cap dominance, MOAT will again be a place to focus my core equity approach, at a valuation level lower. This is how I have used it in the past.
MOAT would be an important consideration, but there isn’t currently a single broad-based core equity ETF that I’m willing to “own.” These are all “rentals” at this point, I don’t use MOAT as a rental like I do with many other stock ETFs that target market segments, sectors, industries, etc.
Investors are looking to shed the inflationary impacts resulting from the economic catalysts of the COVID-19 pandemic in 2020. With inflation data cooling and the Federal Reserve signaling a possible end to its rate-raising campaign, inflation could continue to decline. But I am less an economist than an investor (30 years old).
But rates will likely remain higher than many market participants are accustomed to, so investors will face lower growth rates and difficulty for companies to meet and adjust forecasts. annuals. This is not an environment in which I can pay a higher earnings multiple, even for one of my favorite baskets of stocks that has been a good winner for me in the past. I give it a hold rating because I can’t call it “broken” at this point, but it’s just not a good deal.