Morningstar Wide Moat Focus Index — What Is It?

Certain stock indexes are created to measure the price performance of a basket of stocks that represent a chosen segment of the market. The Morningstar Wide Moat Focus index is one of such, but what is it?

The Morningstar Wide Moat Focus Index is a rules-based, equal-weighted stock index that tracks the performance of companies with Morningstar Economic Moat Ratings of wide that are trading at the lowest current market price/fair value ratios. It consists of stocks of companies with sustainable competitive advantages according to Morningstar’s equity research team.

Want to know about this index and the funds that offer exposure to it? Keep reading!

What is the Morningstar Wide Moat Focus index?

The Morningstar Wide Moat Focus Index is a rules-based, equal-weighted stock index that tracks the performance of stocks with Morningstar Economic Moat Ratings that are trading at the lowest current market price/fair value ratios. The Moat ratings and fair value estimates are determined through independent research conducted by the Morningstar Equity Research team.

It consists of stocks of companies with sustainable competitive advantages according to Morningstar’s equity research team. Those are the most undervalued (trading at the lowest current market price/fair value ratios) and highest-quality companies in Morningstar’s coverage universe. They have an economic moat rating of wide, which means that they have advantages that will fend off competitors for at least 20 years.

Morningstar’s ratings for economic moat — a term originally coined by Warren Buffett — indicate how likely a company is to keep competitors at bay for an extended period. Of course, one of the important factors in finding superior long-term investments is buying companies that will be able to stay one step ahead of their competitors. It is this characteristic that Morningstar is trying to capture with the economic moat rating, which will be either wide, narrow, or none for stocks under coverage.

In addition to being wide-moat stocks, their shares must be undervalued, with some margin of safety, which means they must be trading below their fair value estimates, which are determined through independent research conducted by the Morningstar Equity Research team.

In essence, the Morningstar® Wide Moat Focus index is an equal-weighted equity index that is composed of wide-moat stocks that are trading at the lowest current market price/fair value ratio. According to Morningstar’s equity research team, the index is intended to offer exposure to attractively priced companies with sustainable competitive advantages. But being an index, you cannot trade it directly; you trade or invest in it via an exchange-traded fund (ETF) that tracks the index.

Some key features of the Morningstar Wide Moat Focus index

These are some of the features of the Morningstar Wide Moat Focus index:

Index composition

The Morningstar Wide Moat Focus index contains at least 40 attractively priced US companies with sustainable competitive advantages, according to Morningstar’s equity research team. Each constituent stock must have the Morningstar economic moat ratings of wide.

As of 30-Jun-22, the top 10 index constituents (%) of the index are as follows:

Ticker	Company	Weightings (%)
K US	KELLOGG CO	3.15
VEEV US	VEEVA SYSTEMS INC-CLASS A	2.90
GILD US	GILEAD SCIENCES INC	2.89
BIIB US	BIOGEN INC	2.75
WU US	WESTERN UNION CO	2.65
ECL US	ECOLAB INC	2.64
PII US	POLARIS INC	2.58
MSFT US	MICROSOFT CORP	2.57
MAS US	MASCO CORP	2.54
MMM US	3M CO	2.52

Top ten total (%)                                                                                                  27.19

 

As of 30-Jun-22, the sector weightings (%) of the index are as follows:

Sector	Weightings (%)
Information Technology	30.6
Industrials	16.1
Health Care	15.2
Financials	11.0
Consumer Discretionary	8.5
Consumer Staples	7.9
Communication Services	7.1
Materials	3.5
Total weightings	99.9

 

Companies eligible for inclusion in the Index:

There are criteria for companies that can be included in the index. The stocks eligible for inclusion in the index are companies:

• Selected from Morningstar US Market Index (Parent Index)
• Assigned an Economic Moat rating of wide by Morningstar’s equity research team
• Trading at a fair value, as estimated by Morningstar’s equity research team

Methodology highlights for Morningstar Wide Moat Focus Index:

Here’s the method used in creating the index:

• Staggered reconstitution: This means that the index is divided into two equally-weighted sub-portfolios, and each is reconstituted and rebalanced semi-annually on alternating quarters. Each sub-portfolio will contain 40 equally-weighted securities at its semi-annual reconstitution and weights will vary with market prices until the next reconstitution date. Then, each sub-portfolio is reweighted to 50% of the total index every six months.
• Buffer rule: At each quarterly review, current index constituents ranked within the top 150% of the eligible universe based on the current market price/fair value ratio are given a preference for inclusion. Then, from among the remaining eligible securities, those with the lowest current market price/fair value ratios are included in the index
• Sector cap: This is set at the greater of 40% or corresponding weight in Parent Index + 10%

 

ETFs that track the Morningstar Wide Moat Focus Index

One ETF that tracks the index is the VanEck Morningstar Wide Moat ETF, with the ticker symbol MOAT. This ETF invests in a basket of companies that have ‘wide moats’ or sustainable competitive advantages that are very difficult for competitors to breach, in accordance with the Morningstar Wide Moat Focus Index.

Those wide-moat-rated stocks could make for great long-term investments as they generally rely on brand name power, have high switching costs, or use the ‘network effect’ to prevent new entrants. Expectedly, the fund has a heavy focus on giant and large-cap firms, which have exploited their advantages to the utmost.

MOAT gives investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team. The ETF aims to provide investment returns before fees and other costs which track the performance of the index.

With ETF trading in the U.S. markets, this Morningstar Wide Moat Focus Index ETF has total assets under management of $6.33B, and the average expense ratio is 0.47%. The equity class ETF was first by VanEck on April 25, 2012, to offer exposure to a diversified portfolio of undervalued US stocks.

Morningstar Wide Moat Focus Index performance

How has the ETF performed?

MOAT started trading in 2012 and has thus far beaten the S&P 500 by a wide margin: 209% vs 171%.

Here is the chart from Yahaoo!finance:

We would argue that Morningstar Wide Moat Index seems like a good investment alternative.