The VanEck Morningstar Wide Moat ETF (ASX: MOAT) is one of the best ASX-listed exchange-traded funds (ETFs), and I think it would be a great pick for people in retirement.
It may not be one of the biggest or most well-known ASX ETFs, but it could be exactly what retirees are looking for.
There are four key criteria that I believe make a good investment choice for retirees: passive investing, good returns, resilience in recessions and cash flow potential.
So, I'll run through those four factors and explain why it's a good choice.
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Passive investing
If I were in retirement, I wouldn't want to constantly think about what to do with my portfolio.
Choosing an investment like an ASX ETF (or a listed investment company (LIC)) can make a lot of sense because each fund comes with dozens, hundreds or even thousands of holdings. That's a lot of diversification in one investment.
We could own the right ETF/LIC for the rest of our lives because of what it can bring to our portfolio. ETFs and LICs adjust their portfolios over time, ensuring the holdings are still relevant.
Good returns
The MOAT ETF invests in a portfolio of businesses with strong competitive advantages, or economic moats.
Those competitive advantages can make it very difficult for challengers to capture market share. Moats can take many different forms, including cost advantages, intangible assets (patents, brands, and regulatory licenses), switching costs, network effects, and efficient scale.
While the ASX ETF only considers businesses with strong moats, it also only invests in target companies trading at attractive prices relative to how much Morningstar's analysts think those companies are worth.
This combination of factors – moat investing and focusing on good value – has led to the MOAT ETF delivering an average return per annum of 15.9% since inception in June 2015. Of course, past performance is not an ultra-reliable indicator of future performance.
Resilience
Ideally, I wouldn't want to see significant volatility during bear markets and recessions. Although share prices do decrease at times, it would be helpful if our investments tended to drop less than the market during a sell-off. This is not guaranteed, but two factors can make this a possibility.
The MOAT ETF only invests in businesses with wide economic moats. That means it only invests in companies that Morningstar analysts think will almost certainly keep making outsized profits for the next decade or two. Those sorts of businesses may fall less if the market is more confident about their long-term profitability.
Second, and this reason is less reliable, is that the MOAT ETF invests in US businesses, which means foreign currency changes can have an effect for Aussies. For some reason, the market usually devalues the Australian dollar during market downturns because the Aussie dollar is seen as a 'risk' asset.
It can mean a global share market sell-off hurts less if we're invested in US businesses and the Aussie dollar weakens. For example, if the MOAT ETF fell 20% in US dollar terms, but the Australian dollar weakened by 10%, then we'd only see an approximate 10% decline in our investment in Australian dollar terms. Again, it isn't guaranteed to play out like this.
Cash flow potential
Most retirees may look for investments that provide dividends as cash flow. But, we can also unlock cash flow by selling a portion of our investment.
Firstly, I'd make sure to turn on the distribution reinvestment plan (DRP) to ensure the ASX ETF's distributions are added back to the fund balance each year before deciding how much to sell.
If an investment increases in value by 10%, we could sell 5% of it – for a 5% cash flow 'yield' – and still see the fund's capital growth.
For example, if someone started with a $100,000 investment balance and it delivered a 10% total return, the value would grow to become $110,000. Someone could sell $5,000 – 5% of the starting balance – and be left with $105,000 at the end of year one. I wouldn't sell much more than 5% because sometimes market declines happen, so it's good to 'bank' capital gains for difficult years.
The MOAT ETF's long-term returns help this strategy become a possibility.
