JULIE COOLING: Hi, I'm Julie Cooling, Founder of RIA Channel and contributor with Forbes. I'm here with Matthew Murphy, Director of National Accounts for VanEck. Matthew, thanks so much for being with me today.
MATTHEW MURPHY: Thanks for having me, absolutely.
COOLING: So we're here today and we're going to talk about MOAT – M-O-A-T – which is the MOAT ETF that you run with Morningstar – Morningstar is the index provider – one of the most successful ETFs in our industry, both from a flow standpoint as well as performance. Tell us a little bit about the investment strategy.
MURPHY: Sure. I think from a philosophical point of view moat investing is really based on owning companies with sustainable competitive advantages that are trading at attractive valuations. We leverage the intellectual horsepower from Morningstar. Morningstar has an equity research desk that's been around since 2002, and what they're doing when they're recommending their buy list is they're looking for companies that have some sort of a barrier to entry or competitive advantage relative to their peer group. They've identified a number of different sources of economic moat – things like high switching cost, things like an intangible asset – and throughout their research they cover 1,500 stocks globally.
What they do is they go through and they assign one of three different moat ratings to an individual equity – either no moat, narrow moat, or wide moat – and the difference between those categories is really the confidence interval and the amount of time that they can forecast it into the future. So we're looking specifically for wide moat companies. We're looking for companies that we can forecast out their competitive advantage 20+ years into the future. And step two is really to own those companies at the right price. So across different sector coverages for Morningstar's team they have one consistent methodology whereby they value securities using cash-flow modelling and really just owning the most deeply discounted relative to their fair value analysis within the portfolio.
COOLING: So what you end up with is 40 to 50 stocks, so pretty concentrated portfolio.
MURPHY: Fairly concentrated.
COOLING: And it's an ETF, so it's passive, but it's really quarterly adjustments on the index. Talk about that.
MURPHY: That's right, there is a quarterly rebalance with the ETF. Primarily, the majority of the turnover is driven by valuation changes. On occasion, there are re-ratings that happen with the Morningstar team determining that a business model might have changed, but most of the turnover takes place at the valuation level. As stock prices go up and down, you'll see the relative valuation measure for individual securities within the portfolio change, and that's the majority of the way that the turnover is driven.
COOLING: Talk about how advisors are using this in their portfolios.
MURPHY: There's really two different ways that advisors are incorporating this into their portfolios. The first is that – no surprise – we've heard a lot about the shift from active to passive in recent years, and really over the past five years. Advisors are looking to lower overall costs into client portfolios. At 49 basis points, it is a relatively low-cost strategy, and you still benefit from that active tilt. It's still leveraging all of Morningstar's equity research in terms of making allocation decisions. And the second is to add some sort of an alpha generator to any low-cost, core S&P 500 allocation for their clients.
COOLING: Wonderful, really insightful. Thank you so much for being with me today.
MURPHY: Thanks for having me. I appreciate it.
- - - - - - - - - - - - - - - - - - -
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. Fund Holdings will vary.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
The Morningstar® Wide Moat Focus IndexSMwas created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar® Wide Moat Focus IndexSM consists of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar. The S&P 500 Index consists of 500 widely held common stocks.
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.
An investment in the Fund may be subject to risks which include, among others, investing in equity securities, health care, consumer staples and information technology sectors, medium-capitalization companies, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive 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.
Fund shares are not individually redeemable and will be issued and redeemed at their 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 the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. 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.
Van Eck Securities Corporation, Distributor
666 Third Avenue, New York, NY 10017