I think this ETF is set to beat the ASX again and again

This ETF has loads of growth potential, in my view.

| More on:
A young boy plays on a sunny beach pouring water from a bucket into a moat he has built around a sandcastle that is decorated with colourful shells.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I'm a big fan of the ASX-listed exchange-traded fund (ETF) VanEck Morningstar Wide Moat ETF (ASX: MOAT) because of its capability to potentially beat the S&P/ASX 300 Index (ASX: XKO).

No investment is guaranteed to outperform another one of course, and past performance is not a reliable indicator of future performance.

But if I had to pick to own either the MOAT ETF or the Vanguard Australian Shares Index ETF (ASX: VAS) (which tracks the ASX 300), I know which one I'd rather buy for a few different reasons.

Historical performance

Ultimately, investing is all about making returns.

Let's look at how each of the investments has performed in recent history.

Over the past three years, the VAS ETF has returned an average of 8.1% per year, and the MOAT ETF has returned an average of 12.2%.

In the last five years, the VAS ETF has returned an average of 8.3% per year, and the MOAT ETF has returned an average of 14.6%.

Over the last 10 years, the VAS ETF has delivered an average return per year of 8.9%. The MOAT ETF is not 10 years old, so I'll mention the return over the past decade of the index it tracks, which has returned an average of 16.4%.

I believe there are three main reasons VanEck's offering has outperformed the ASX share market and why it may continue to.

Strong economic moats

Analysts from Morningstar have assigned economic moat ratings to approximately 1,500 US companies under their coverage.

What's a moat? Morningstar notes that an "economic moat is a sustainable competitive advantage that allows a company to generate positive economic profits for the benefit of its owners over an extended period."

Moats can include things like intellectual property, cost advantages, switching costs, network effects and efficient scale.

For a business to be rated as having a wide economic moat, it must, "with near certainty", be able to generate excess profits 10 years from now. In addition, excess profits "must, more likely than not, be positive 20 years from now."

The Morningstar analysts are looking for the duration of the moat rather than the current absolute size. The research outfit explains:

For example, if a high-flying tech company is a first-mover in offering a popular, innovative product or service, it might quickly achieve very high returns on invested capital. However, if there is no moat source (such as intellectual property) preventing competitors from replicating that product or service, we would assign a no-moat rating. In this case, the heady economic profits the company has been able to generate due to its first-mover advantage would likely deteriorate quickly as new competition enters the market.

Only businesses with excellent moats are allowed into the portfolio.

Good value stocks

There is a second layer of the investment strategy that helps the MOAT ETF perform so well, in my opinion.

VanEck says that target companies must be trading at attractive prices relative to Morningstar's estimate of fair value.

In other words, analysts believe these companies must be attractively priced compared to what they're actually worth (in theory).

With this tactic, the MOAT ETF should always have a portfolio of good-value, high-quality businesses that could outperform in the short term and long term.

ASX blue-chip shares earning low returns on retained profit

The ASX stock market is weighted to leading ASX bank shares and ASX mining shares. However, those businesses are not known for generating strong returns on equity (ROE).

That means that retained profits within the businesses are not unlocking major profit growth, which is a key driver of share price growth. The businesses are also paying out a substantial amount of their profit as a dividend each year, which is helpful for short-term passive income but leaves less within the business for reinvestment.

Overall, I think the MOAT ETF is set up to perform well over the long term and continue to beat the ASX 300.

Should you invest $1,000 in Vaneck Investments Limited - Vaneck Vectors Morningstar Wide Moat Etf right now?

Before you buy Vaneck Investments Limited - Vaneck Vectors Morningstar Wide Moat Etf shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Vaneck Investments Limited - Vaneck Vectors Morningstar Wide Moat Etf wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended VanEck Morningstar Wide Moat ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ETFs

ETF spelt out with a rising green arrow.
ETFs

Invest $500 into these fantastic ASX ETFs

These funds could be great picks for investors with money to invest in the share market this month.

Read more »

A group of office workers pump the air to celebrate
ETFs

Why VanEck Australian Equal Weight ETF could be a top performing ASX ETF in 2025

This ETF could be primed for a particularly successful 2025.

Read more »

woman talking on the phone and giving financial advice whilst analysing the stock market on the computer with a pen
ETFs

2 under the radar ASX ETFs that are up more than 100% over 5 years

It might be worth adding these two ETFs to your radar.

Read more »

a business person checks his mobile phone outside a Wall Street office with an American flag and other business people in the background.
ETFs

The pros and cons of buying BetaShares NASDAQ 100 ETF (NDQ) units this month

Is this the right time to invest in US stocks?

Read more »

Smiling business woman calculates tax at desk in office.
ETFs

Buying the dip: $10,000 invested in VTS ETF and NDQ ETF at the recent trough is now worth?

Let's do the calculations.

Read more »

ETF spelt out
ETFs

3 compelling ASX ETFs I'd buy for diversification and income

These funds offer a number of compelling attributes.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
ETFs

3 high-conviction ASX ETFs to buy and hold forever

These funds could be quality picks for investors looking for buy and hold options.

Read more »

A young man punches the air in delight as he reacts to great news on his mobile phone.
ETFs

5 excellent ASX ETFs to buy now

Here are five funds that could be top picks for Aussie investors this month.

Read more »