Ryan Jackson: Some of the best stocks are the ones that stay one step ahead of their rivals. The Morningstar Economic Moat Rating measures that trait by evaluating the strength and durability of companies’ competitive advantages. An edge that should last 20 years merits a wide moat rating; a 10-year advantage garners a narrow moat; and stocks unlikely to keep their competition at bay receive no moat at all.
ETFs don’t have moats, but their holdings do. Portfolios with a heavy dose of wide-moat companies tend to be high-quality buys that protect the downside better than most. Today we’ll cover three ETFs chock-full of wide-moat stocks. All three earn a Silver Morningstar Medalist Rating, reflecting our analysts’ confidence that they will beat their category indexes on a risk-adjusted basis over the long haul.
3 ETFs Full of Wide-Moat Stocks
- Invesco S&P 500 Quality ETF SPHQ
- SPDR S&P Dividend ETF SDY
- Harbor International Compounders ETF OSEA
Let’s start with Invesco S&P 500 Quality ETF. It trades under the ticker SPHQ and charges a paltry 0.15% fee.
This index strategy ranks all stocks in the S&P 500 by quality score and plucks the top 100 for its portfolio. It weights the selections by the product of their quality score and market cap, doubling down on quality and tying portfolio weight to market price.
The quality score favors stable, profitable companies to those that mortgage their balance sheets for rapid growth. That blueprint makes wide-moat stocks a popular choice. At the end of October 2024, roughly 77% of the portfolio comprised wide-moat companies—about 15 percentage points more than the Morningstar US Large-Mid Index and large-blend category average.
Those holdings have flexed the merits of their moats. SPHQ ranked in the top 1% of all large-blend funds over the 15 years through October and well within the best quintile over the trailing three-, five-, and 10-year periods.
Let’s move on to SPDR S&P Dividend ETF, SDY, an index fund of dividend diehards that sits in the mid-cap value category.
This strategy only admits stocks from the S&P 1500 Index that raised their dividends for 20 consecutive years. Demanding? Yes. But that strict requirement confers key advantages for the portfolio.
Its preference for wide-moat companies is chief among them. They represented 36% of the portfolio entering November 2024, compared to 11% of the Russell Midcap Value and 7% of its average peer.
The portfolio normally spans 100 to 150 holdings. It weights them by their dividend yield—a weighting approach that explains the value tilt. Cheaper stocks have slumped for quite some time, but this fund sports a sparkling long-term track record anyway. It gained 9.7% per year over the past decade, beating its category index by 1.2 percentage points per year and ranking among the top 10% of the mid-value peer group.
Rounding out today’s list is Harbor International Compounders ETF, an actively managed foreign-stock strategy that goes by the ticker OSEA.
Copenhagen-based C Worldwide subadvises this fund. It deploys a collegial team of skilled, experienced managers and analysts to run the strategy. Two of the managers have overseen this fund since the early 1990s, gaining a wealth of experience that underpins their Above Average People Pillar rating.
The team invests with high conviction to express its long-term view on stocks and themes. It tends to focus on enduring competitive advantages and pricing power—two core elements of a company’s moat. That explains why roughly 56% of this 30-stock portfolio’s money sat in wide-moat companies. That ratio exceeded the foreign large-growth category index by 18 percentage points and its average peer by 13.
This ETF has a short track record since it just launched in late 2022. But the strategy has long thrived in other vehicles, and the early returns here are promising. It gained 18.9% annualized over the two years through October 2024, besting the category index and ranking just outside its peer group’s top quartile.
Watch 3 Great Contrarian ETFs for more from Ryan Jackson.
