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Morningstar gives the VanEck Morningstar Wide Moat ETF (MOAT) and the Vanguard Information Technology Index Fund ETF (VGT) 5-year, 10-year, and overall five-star ratings.
Based on past performance, those stellar ratings are well earned. If you track the total return for any extended period, be it a one-year, three-year, five-year, or ten-year time frame, both ETFs beat the S&P 500, and often by wide margins.
VGT does the same in respect to the Invesco QQQ Trust ETF (QQQ). And while doing so, it also provides a larger and faster growing yield.
The two ETFs have markedly differing investment strategies, yet each has a long history of very consistent market outperformance.
Why MOAT Gets My Vote
MOAT tracks the performance of the Morningstar Wide Moat Focus Index (MWMFTR). MWMFTR has outperformed the S&P 500 on a total return basis since its inception in 2007. And on average, the Morningstar Wide Moat Index outperforms the S&P by 2% annually.
Morningstar must award a stock a wide moat rating for it to be listed on MWMFTR.
It is of interest to note that although Morningstar’s equity coverage skews toward companies with economic moats, only 10-15% of all stocks covered by Morningstar are awarded a wide moat rating.
Morningstar’s analysts evaluate stocks to determine if they hold a competitive advantage that is likely to keep rivals at bay for a minimum of twenty years. Some attributes needed to qualify as a wide moat advantage include switching costs, intangible assets, a network effect, cost advantages, and/or efficient scale.
However, a wide moat alone will not result in inclusion in MWMFTR. A company must also trade at a valuation relative to fair value that is better than that of other wide moat stocks. Consequently, only the stocks with the best valuations are chosen for MOAT.
On average, approximately 145 stocks are listed by MWMFTR. In contrast, MOAT invests in a portfolio of about 50 companies.
Sector exposure is limited to forty percent, and MOAT lists approximately 50 holdings at any given time.
Health Care and Financials at 19.9% and 19.2%, are currently the most heavily weighted sectors. This is followed by Industrials at 15.8%, and Information Technology at 15.5 % of the portfolio.
The Consumer Discretionary, Communications Services, Materials and Consumer Staples sectors round out MOAT’s holdings with each constituting a mid to high single digit weighting.
Here it is useful to note how the fund responds to market changes with rather impressive alacrity. In June, when I last reported on the fund, the Information Technology sector constituted nearly 31% of MOAT’s portfolio.
At that time, Meta Platforms (META), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL) were the six largest positions and collectively constituted 13% of MOAT’s portfolio.
Today, Alphabet is the only name among the six that remains in the top ten. Comcast (CMCSA), Alphabet, Wells Fargo (WFC), Schwab (SCHW), Tyler Technologies (TYL), Gilead (GILD), Intercontinental Exchange (ICE), Veeva Systems (VEEV), U.S. Bancorp (USB), and Corteva (CTVA) now make up the top ten, at a 2.7% to a 2.52% weighting.
MOAT uses a staggered rebalance methodology. The fund divides the Index into two equally weighted sub-portfolios which are reconstituted and rebalanced semi-annually in alternating quarters.
The fund then screens for the 40 companies trading at the largest discounts to fair value according to Morningstar. However, a stock must be rated below the top 60 in value to be removed from the listing.
MOAT has an expense ratio of 0.46 percent.
The ETF yields 1.08%, and the 5-year dividend growth rate is 12.23%. Investors should be advised that the distribution is paid on an annual basis.
MOAT is required to pass through income and capital gains to shareholders each year; however, the fund has never paid a capital gain distribution despite its 2012 launch.
Why VGT Is For Me
VGT tracks the MSCI US Investable Market Information Technology 25/50 Index. Unlike many ETFs, VGT’s portfolio is heavily concentrated in a small number of stocks, and the fund is 100% invested in the Information Technology sector.
Currently nearly 80% of the fund’s portfolio is invested in four sectors. Systems Software along with Technology Hardware, Storage and Peripherals each constitute a 23% sector weighting.
That is followed by Semiconductors, with a 20.2% weighting, and Application Software at 15.3% of the fund’s portfolio.
The ETF is heavily concentrated in two tickers: Apple (AAPL) makes up just over 21% of the portfolio, with Microsoft in second place and constituting 17.06% of the fund.
The remainder of the top ten holdings consists of NVIDIA (NVDA) 6.17%, Broadcom (AVGO), 3.19%, Adobe (ADBE) 2.16%, Cisco (CSCO) 2.03%, Salesforce (CRM) 1.87%, Accenture (ACN) 1.79%, Oracle (ORCL) 1.59%, and Advanced Micro Devices at 1.53% of the portfolio.
Due to the concentration in one sector, the fund is not for the faint of heart. VGT’s lack of diversification can often lead to volatile returns. However, on the positive side, volatility can also lead to more profitable entry points for those with a bit of patience. Furthermore, Morningstar rates VGT as having an average risk profile while posting historic returns that are well above average.
On occasion, VGT holds small positions in credit card companies as well as small- and micro-cap firms. The ETF does not invest in telecoms, gaming or internet services companies.
The index is rebalanced on a quarterly basis and has a 0.10% expense ratio.
The current yield is 0.76%, and the 5-year dividend growth rate is 13.21%.
Summing It All Up
It is often stated that past performance is no guarantee of future results. My response to that observation is to ponder the data.
TOTAL RETURNS COMPARISON
1 year 3 year 5 year 10 year
QQQ 34.76% 30.41% 117.23% 385.46%
VGT 35.15% 34.11% 134.85% 465.65%
VOO 17.85% 31.77% 69.58% 197.96%
MOAT 23.63% 38.23% 76.68% 208.49%
Could one or both ETFs falter and provide poor long-term returns? While that is possible, I would argue that the track record of the two ETFs, which encompasses a variety of economic conditions and downturns, argues against that as a likely outcome.
MOAT has been around for nearly twelve years. In that time frame, it has returns that place it in the top 1% of its peers. With a portfolio consisting of companies with enduring moats trading at below average valuations, MOAT has a rather common-sense approach to investing.
Morningstar provides an overall rating for MOAT of 5 stars. The historic risk and return are both rated as high.
With a focus on the leaders in the tech industry, VGT is a means to invest in cutting edge technologies.
Morningstar provides an overall rating for VGT of 5 stars. The historic return is rated as 4 on a scale of 1 to 5, and the risk is rated as 3.
While I have a strong conviction regarding the high quality of these two investments, I believe both ETFs are trading at reasonable, but not alluring, valuations.
I rate VGT as a Reasonable Buy, meaning I am willing to add marginally to my position.
I rate MOAT as a Hold.
I would need the share price to fall towards the mid-60s level to add to my position.
