wide moat stocks
Investing & Retirement

How to Invest in Wide-Moat Stocks

July 10, 2024 - Dan Urner

Companies that are protected from competition by a wide margin or “moat” would seem like a good investment. This moneyland.ch guide explains how to invest in wide-moat stocks.

Stocks can potentially be a risky investment, so the concept of stocks that are protected as if by a castle moat is appealing to many investors. In this guide, moneyland.ch explains what wide-moat stocks are, and how to invest in them as a Swiss investor.

What is a wide-moat stock?

The term wide-moat stock was coined by American investor Warren Buffet. The metaphor describes companies that have a large competitive advantage that acts protects them from competition in the same way that a moat protects a castle. Stocks that have this designation promise higher investment security. For that reason, they are often used for buy-and-hold investment strategies.

Wide-moat companies typically share these features:

  • A dominant market position
  • High pricing power
  • A business model that is difficult to replicate
  • A strong brand (or brands)
  • Strong customer relationships

Which companies qualify as wide-moat stocks

The companies that are considered examples of wide-moat stocks vary depending on the source. Examples of companies that are broadly accepted as wide-moat stocks include:

  • Microsoft: The tech giant enjoys a dominant position thanks to its software applications and its Windows operating system.
  • Alphabet:  The company’s Google search engine dominates the market for Internet searches in most countries.
  • Coca-Cola: While many companies compete in the beverages market, Coca Cola has built a globally-recognized brand and strong supply and retail chains.
  • Apple:  Apple benefits from an unmistakable brand and a large international fan base.
  • Union Pacific:  The US railway company operates its own railway network, which makes it difficult for new players to enter the market.

Four Swiss companies – Richemont, Julius Bär, Roche, and Nestlé – are included in the Morningstar Global Wide Moat Focus index.

Are there any indexes for wide-moat stocks?

There are several indexes that track wide-moat stocks. Financial services provider Morningstar publishes four different wide-moat stock indexes which differ in various aspects. Only one of these is a global stock index, while the other three focus entirely on US stocks.

The Solactive Brand Finance Global Brands Index does not specifically refer to wide-moat stocks in its title or description. However, according to its publisher the index tracks the world’s most valuable brands. De facto, many of these are wide-moat stocks.

Table 1: Overview of wide-moat stock indexes

Index Number
of Stocks
Countries with
heaviest weighting
Stocks with
heaviest weighting
Morningstar Global Wide Moat Focus Index 70 USA (46.33%),
United Kingdom (10.51%),
China (6.55%)
Teradyne (2.70%)
Morningstar US Small-Mid Cap Moat Focus Index 102 USA (100%) Teradyne (1.79%)
Morningstar US Sustainability Moat Focus Index 60 USA (100%) Teradyne (3.30%)
Morningstar Wide Moat Focus Index 54 USA (100%) Teradyne (3.38%)
Solactive Brand Finance Global Brands Index 82 USA (79.4%),
Germany (3.8%),
Taiwan (3.4%)
Nvidia (6.52%)

Source: Index publishers. Date: July 5, 2024.

A point that stands out when looking at the makeup of the Morningstar Global Wide Moat Focus index: Although the index includes just 70 stocks, the ten most heavily weighted stocks together only make up around 23 percent of the index. That means the performance is not dominated by just a few stocks. For the sake of comparison, while the global MSCI World index includes more than 1400 different stocks, the 10 most heavily weighted stocks make up 25 percent of the index (as per July 2024).

Table 2: The 10 most heavily weighted stocks in the Morningstar Global Wide Moat Focus index

Stock Sector Country Index
weighting
Teradyne Electronics, semi-conductors USA 2.70%
Alphabet (A) Internet, software USA 2.55%
Taiwan Semiconductor Electronics, semi-conductors Taiwan 2.37%
Safran Aerospace France 2.27%
Tyler Technologies Internet, software USA 2.23%
Bank of New York Mellon Banking USA 2.23%
GSK Pharmaceuticals United Kingdom 2.20%
Kao Chemicals, cosmetics Japan 2.20%
Emerson Electric Electrical components USA 2.19%
Imperial Brands Tobacco United Kingdom 2.12%

Source: Index publisher. Date: July 05, 2024.

Can I invest in wide-moat stocks using ETFs?

Yes, there are exchange-traded funds (ETFs) that track the indexes listed above. ETFs are traded on stock exchanges just like the stocks of companies. You can buy and sell shares in ETFs at any time during trading hours using a stock broker. The checklist for choosing the right ETF explains what you should pay attention to.

Table 3: Overview wide-moat ETFs

ETF ISIN Fund
domicile
TER
(fund cost)
Dividends Replication
Morningstar Global Wide Moat Focus Index
VanEck Morningstar Global Wide
Moat UCITS ETF
IE00BL0BMZ89 Ireland 0.52% Accumulating Physical
Morningstar US Small-Mid Cap Moat Focus Index
VanEck Morningstar US SMID
Moat UCITS ETF
IE000SBU19F7 Ireland 0.49% Accumulating Physical
Morningstar US Sustainability Moat Focus Index
VanEck Morningstar US Sustainable
Wide Moat UCITS ETF
IE00BQQP9H09 Ireland 0.49% Accumulating Physical
Morningstar Wide Moat Focus Index
VanEck Morningstar US Wide
Moat UCITS ETF
IE0007I99HX7 Ireland 0.46% Accumulating Physical
VanEck Morningstar Wide Moat ETF AU00000MOAT4 Australia 0.49% Distributing Physical
Solactive BrandFinance Global Brands Index
L&G Global Brands UCITS
ETF USD Acc
IE0007HKA9K1 Ireland 0.39% Accumulating Physical

Sources: Fund managers. Date: July 8, 2024.

What are the risks of investing in wide-moat stocks?

Investing in stocks and ETFs always comes with a risk of loss. But there are several additional risks that are specific to wide-moat stocks:

  • Lack of innovation: Wide-moat companies can run the risk of overestimating their market position. If this happens, the company’s innovative potential may suffer. Over time, the company may lose its competitive advantage.
  • Regulations: Companies with very dominant market positions may be targeted by political measures. In extreme cases, this could result in the company being broken up into smaller companies.
  • Poor diversification: ETFs that invest in wide-moat stocks are not particularly well diversified. Most invest in less than 100 different stocks. Placing all your money in just a few individual stocks increases the risk of loss.

How well do wide-moat stocks perform?

There is no way to predict how wide-moat stocks will perform in the future. Predicting the future returns of stocks or ETFs is impossible. The only information we have about the performance of wide-moat stocks comes from their past performance. The historical data for the global VanEck Morningstar Global Wide Moat UCITS ETF shows that its performance since it launched in 2020 has been poorer than that of global ETFs based on the FTSE All-World Index.

Table 4: Global wide-moat ETF performance compared

ETF Index Performance in
CHF (2020-2024)
Vanguard FTSE All-World UCITS ETF Distributing FTSE All-World Index 54.24%
VanEck Morningstar Global Wide Moat UCITS ETF Morningstar Global Wide Moat Focus Index 29.39%

Source: Justetf.com. Term used for comparison: July 7, 2020 - July 5, 2024. Date: July 8, 2024.

It is important to bear in mind that stocks and ETFs are best-suited to long investment terms – generally periods much longer than the four years used for the comparison. Over longer terms, the performance can radically differ from the results shown in Table 4.

Note: The information provided in this article is for educational purposes only, and should not be considered investment advice. moneyland.ch does not accept any liability.

More on this topic:
Compare Swiss stock brokers now
How to invest money in Switzerland
Checklist for choosing the right ETF
Checklist for choosing the right stock

Editor Dan Urner
Dan Urner is editor at moneyland.ch.
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