This is a boring idea, and I believe that most of you would have reasonable objections to buying things managed by other people, but this is the largest holding in my kid's accounts and I've used it for years and I'm retired anyway, so I recommend MOAT, an ETF.
I've never forgot that in Beating the Street (published 1993), the world's most successful active manager at the time (Peter Lynch), suggested that in assembling a mutual fund portfolio:
"You could throw in a couple of index funds to go along with the managed funds."
This was especially interesting considering that, in my personal opinion, the market was still very inefficient back in those days. Now, indexing is accepted as common wisdom, and as a retired investor with less time on my hands I continue to hold index exposure though I'm always on the lookout for a potential edge. MOAT has provided that edge, especially as a compare vs. the SP500.
1. Expenses - expense ratio for VOO for 0.03%, MOAT is 0.46% adjusted. This is the best reason to own VOO over MOAT.
2. Performance - clear win for MOAT; over all periods measurable, MOAT has outperformed VOO. Given that VOO has beaten all other indexes and the vast majority of actively managed funds (hedge funds included), this is a stellar record
Biggest holding is less than 3%, with 54 holdings at present. MOAT is overweighted with Tech at 21% but less than 28% for the VOO (using Morn's figures), with similar exposures but different allocations (MOAT at 18% healthcare, VOO at 14; Financial Services at 16 vs 12%, etc.). this is entirely personal, but on a quick scan basis i actually like the MOAT's portfolio better right now, especially after the run-up due to AI excitement in the big tech stocks, but you can make your own judgement here. I'd almost call this a pass, cause unlike VOO MOAT could look different again in 3 months or 6 months. Lastly, MOAT's holdings are exclusively 100% "wide moat" stocks while VOO is mixture of wide moat, narrow moat, and to a lesser degree no moat stocks. Over long time periods, I am convinced these classifications lead to outperformance (FCF is higher with a moat), unless you are taking advantage of trading opportunties in the cruddy areas of the market.
4. Will MOAT's peformance edge continue? This is really the only question that matters - MOAT has put up really strong numbers over its history, it is a fully invested stock fund, the cap exposures are somewhat similar to the VOO, but it is more expensive than the SP500 and that is the one factor that will always be true. Plus, clearly MOAT's recent outperformance has aided all subsequent multi-year comparisons, but on the other hand MOAT used to have a far more concentrated portfolio (20 stocks) which often left the ETF overly sector focused and I believe the selection and rebalancing changes led to a much better product, especially since it made the fund more easily able to grow the AUM.
I REALLY like the approach, like the fact that securities that might be booted out can stick around for another 3 months (benefit from momentum), like the mechanical nature of it, and unlike VOO I never worry that any single holding will become overly large - which happens from time to time with VOO. In my history, it happened in a HUGE way in the early century (which resulted in 3 down years). But in the end, it all comes down to whether you think the Morningstar system of moat classifications 1) makes sense, and 2) most importantly will be interpreted correctly by the underlying nameless faceless people ((with due respect!) the Morn analysts) who make those judgements but who are presumably undergoing consistent turnover.
I am, frankly, an unabased fan. I use Morningstar reports for almost everything I look at (if available), and Morn is by far 10x more useful than the other numberous sell-side reports I have access to via individual brokerage accounts. Reason is because Morn
-uses a uniform approach that
-analyzes the same factors each time, and
-the system of moat classifications as the underpining of how they value the stocks leds to reasonable assumptions as to the fair values of the businesses in question.
This doesn't mean I don't have violent disagreements with some of their conclusions (particuarly in no-moat areas and how they define that for specific industries; or with individual assumptions, but at least you can usually see those assumptions), but in the end IMO you are getting a uniform level of judgement across many people, which in theory means the analyst training is more important than the individual analyst. This is all conjecture on my part, but I don't see really dumb things in Morn reports. It has to be the process itself.
So will performance continue? I don't know, but you don't have to make a binary bet - you can buy both MOAT and VOO.
Course, maybe now is a terrible time to buy any Sp500 substitute, but my kids have 40 - 60 year time horizons so I'm not worried about that (and I've owned MOAT myself for many a year). Given that this is an active fund and changes the holdings, I don't think getting worked up over timing is as important as it might be with a VOO, but that's a small consideration during those times when markets are down big cause most of time most things are down big. So I would frame this as I have in this writeup - if you consider VOO, think about MOAT. If it matters, the only tiny advice that I would give anyone is that if you aren't going to buy MORE when the market is down some sizeable amount, don't hold anything now either, especially since unlike the past 15 years you can make a reasonably good return right now in various fixed income alternatives.
As a P.S. I have always found the holdings in MOAT to be worthy of individual study ala what you can do with the Magic Formula site, but cause you have the Morn reports you can do reviews far more rapidly. I'm also interested in SMOT, a small-mid cap ETF they've recently put together as an alternative to many small and mid cap index funds which contain unprofitable companies, but that one has a limited history (promising). The moat approach doesn't seem to have worked as well overseas, but the jury is out on that one. Finally, larger investors could buy the MOAT holdings directly but it would be a pain and stealing stuff is not a good choice in life.
A final P.S. i just looked at a portfolio done by a successor firm for one of my clients. Honestly, I think MOAT will outperform the stock portion of their portfolio by a country mile at less cost, esp since with many advisors you have no earthly idea whether what their actual track record is cause there are no composites to review. You might not like MOAT for you, but your college friend or 2nd cousin may benefit from things like this, esp. if they want to spice up the indexing...
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.