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How to Access Morningstar’s Moat Philosophy


DOUGLAS YONES: Hi, everyone, I am Douglas Yones, live from the floor of the New York Stock Exchange. I'm joined by Brandon Rakszawski, a Product Manager at VanEck. We're here today talking about moat investing. Brandon, we're talking about two different ETFs aren’t we? We've got MOAT, M-O-A-T, and MOTI, M-O-T-I. Help us understand moat investing and these products.


BRANDON RAKSZAWSKI: What it boils down to is that, with MOAT and MOTI, you can gain global exposure to equities that are high-quality, as assessed by Morningstar, and trading at attractive valuations. So, quality companies without overpaying.


YONES: So, Morningstar: they're helping you drive the investment strategy on these products. But I want to ask you about the term "smart beta." A lot of us hear this in the news. What is smart beta, and do these ETFs fit into the smart beta realm?


RAKSZAWSKI: Smart beta has dominated industry talk and caught the attention of investors, I think, for the past several years. So it is certainly a topic that everyone has on their minds. And then, most recently, factor investing has done the same: single-factor exposure, multi-factor exposure, where someone smarter than me is packaging different exposures to single-factors in a comprehensive index. MOAT and MOTI definitely belong in that conversation. But there are some differentiating characteristics. Traditional smart beta, or factor, investing generally looks backward in time. So it is using data that have been amassed over long periods of time, or recent history, to construct portfolios based on different metrics such as price-to-earnings. Moat investing is a little different. It is very forward looking. Morningstar's equity research analysts assess quality and valuation by looking into the future. On the quality side, they assign economic moat ratings, which determine whether a company can sustain a competitive advantage for ten or twenty years into the future. And their valuation research projects cash flows to arrive at a current intrinsic share value.


YONES: Hence the idea of a moat - almost like a moat around a castle.


RAKSZAWSKI: Exactly.


YONES: It is what a company does to protect its interests and growth. Is that fair?


RAKSZAWSKI: That's very fair.


YONES: You've mentioned a lot of really interesting analytics. Are these actively managed, or are they a passive index?


RAKSZAWSKI: It is a fine line. They're certainly passive. The indices that the two ETFs track, as provided by Morningstar, are rules-based, systematic. They rebalance on a quarterly basis following a preset list of rules. The active side and the human element side comes from the Morningstar's equity research process, where analysts are assessing competitive advantages, or moats - their valuations. That's very active. That's an equity research process. But it's then packaged into a passive vehicle.


YONES: So we've got two strategies that are packaged, as Brandon mentioned, into an ETF. The beauty of ETFs (they trade here at the New York Stock Exchange) is that in one trade, you have access to a whole strategy. Help us understand how investors are using these products today.


RAKSZAWSKI: I would say strategic: strategic, strategic, strategic. These are long-term investments. These were not meant to provide quick access to markets. They are not trading vehicles. So we see investors using the strategy as part of their core. For MOAT -- the U.S. equity core portion of the portfolio. For MOTI -- the international equity exposure. And they're using them in two different ways in that fashion. So they can use them as a core replacement. We've seen investors use MOAT as a complete replacement for their U.S. equity exposure. Or they can potentially think about them as a complement to their core, whether that be their passive market-cap beta index exposure, or their actively managed exposure. They can carve out a piece of those exposures -- portions of their core portfolio, and use the ETFs as complements.


YONES: So we've talked about a lot of different topics today. We've covered passive, we've covered active, we've covered smart beta, and we're talking about moats. There must be another place that all of us can learn more about all these different topics.


RAKSZAWSKI: We have a great insights section on our website, www.vaneck.com, and we post a lot of good content, at least on a monthly basis, if not more frequently, where we provide commentary, videos, and we touch on a lot of these thematic topics that investors are reading about in the mainstream media, whether that be smart beta or active investment.


YONES: I’m guessing you probably have a subscription service?


RAKSZAWSKI: That's right. You can sign up and get emails whenever we update that content.


YONES: Excellent. Well, Brandon, thank you very much for being here. Everyone, thanks for your time at home. Again, another great insight from our friends at VanEck.


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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about VanEck Funds, VanEck Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.



An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Index returns do not represent fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.


Fair value estimate: the Morningstar analyst's estimate of what a stock is worth. Price/Fair Value: ratio of a stock's trading price to its fair value estimate.


The Morningstar® Wide Moat Focus IndexSM and Morningstar® Global ex-US Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors® Morningstar Wide Moat ETF or VanEck Vectors® Morningstar International Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar Wide Moat Focus Index and Morningstar Global ex-US Moat Focus Index are service marks of Morningstar, Inc.


The Morningstar Wide Moat Focus Index consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar. The Morningstar Global ex-US Moat Focus Index consists of companies outside of the U.S. identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.


Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.


Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Global ex-US Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 50 stocks to at least 50 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.


An investment in VanEck Vectors Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in the health care, consumer discretionary, industrials, information technology and financial services sectors, medium-capitalization companies, equity securities, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, replication management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.


An investment in VanEck Vectors Morningstar International Moat ETF (MOTI®) may be subject to risks which include, among others, equity securities, investing in the financial services and consumer discretionary sectors, medium-capitalization companies, foreign securities, foreign currency, emerging market issuers, special risk considerations of investing in European, Asian and Australian issuers, depositary receipts, cash transactions, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, replication management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, which may make these investments volatile in price or difficult to trade. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.


Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.


Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.


No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © Van Eck Securities Corporation.


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