This exchange-traded fund invests in companies deemed to have strong competitive advantages. Since its inception in 2012, it has outperformed the S&P 500 by a wide margin…

A competitive advantage (a.k.a., moat) helps companies fend off competitors and generate higher returns. The more moats a company has, the stronger the company.

Financial services firm Morningstar offers a list of five moats, including: Switching cost, network effect, intangible assets, cost advantage and efficient scale. See here for an explanation of all five.

• 1/ Network effect: Meta is one of the best examples of the network effect. The more Facebook users, the more valuable the platform.
• 2/ Switching cost: Shopify is a good example here. It’s expensive and time-consuming to rebuild an e-commerce store on a different platform, so customers are less incentivized to switch.

Some of these moats are difficult to quantify. How can you tell if a company has strong intangibles (i.e., strong brand)?

Investing in companies with moats

Morningstar also offers a list of stocks — The Morningstar Wide Moat Focus Index — deemed to have strong competitive advantages.

• The index has outperformed the S&P 500 in the ten years leading up to July 9, 2022 — 294% return vs. 187% return.
• The list includes 50 large-cap stocks like Gilead Sciences, Berkshire Hathaway, Microsoft, Medtronic, Adobe, Kellogg and others.

For most investors, this list is a good starting point to build a portfolio. For others, there’s an ETF that automatically invests in the entire list — the VanEck Morningstar Wide Moat ETF (BATS:MOAT).