What is MOTI? (Pros, Cons, and Strategies)

If you're looking to diversify your investment portfolio internationally, the VanEck Morningstar International Moat ETF (MOTI) could be an enticing option. Focusing on companies with sustainable competitive advantages ("economic moats"), MOTI provides exposure to strong international firms poised for long-term growth. In this post, we'll delve into what MOTI is, examine its pros and cons, and discuss strategic approaches to investing in this ETF.

What is MOTI?

MOTI, or the VanEck Morningstar International Moat ETF, is an ETF designed to track the Morningstar Global ex-US Moat Focus Index. This index invests in international companies that Morningstar deems to have sustainable competitive advantages, which are expected to create long-term shareholder value.

Key Features of MOTI

• Focus on Economic Moats: MOTI invests in companies with strong competitive advantages.
• International Exposure: Covers companies outside the United States.
• Rigorous Screening Process: Selection is based on rigorous financial and qualitative assessments done by Morningstar analysts.

After selecting stocks based on their moat ratings, the ETF focuses on undervalued companies with strong fundamentals and competitive positions in their industries.

MOTI Composition

MOTI comprises a diversified portfolio of international businesses from various sectors. Companies from developed and emerging markets are included, providing robust geographic diversification. Major sectors include consumer staples, healthcare, financials, and industrials.

Pros of MOTI

International Diversification

One of the primary appeals of MOTI is its international diversification. Investing outside the U.S. can help mitigate the risks associated with the U.S. market, providing exposure to burgeoning markets and different economic environments.

Focus on Quality Companies

MOTI's focus on companies with sustainable competitive advantages ensures that the ETF invests in high-quality firms. These companies generally exhibit strong financial health, robust earning potentials, and solid market positions.

Potential for Long-term Growth

Economic moats are designed to provide companies with a durable competitive edge, which often translates to long-term growth. By focusing on such companies, MOTI aims to deliver sustained returns to investors.

Reasonable Expense Ratio

MOTI has a reasonable expense ratio of 0.56%, considering its active selection process and international exposure. While higher than some domestic ETFs, this fee is justified by the quality and potential growth of its holdings.

Cons of MOTI

Currency Risk

Investing in international markets introduces currency risk. Fluctuations in foreign exchange rates can affect the fund's returns positively or negatively.

Market Volatility

International markets can be more volatile than the U.S. market, especially in emerging economies. Political instability, economic changes, and other global factors can contribute to this volatility.

Higher Expense Ratio Compared to Domestic ETFs

While reasonable for an international ETF, the 0.56% expense ratio is higher than many domestic ETFs. Investors should weigh this cost against the potential benefits of international diversification and moat-focused investment.

Limited Track Record

Compared to well-established domestic ETFs, MOTI has a relatively shorter track record. Investors should consider this when evaluating its potential for long-term performance.

MOTI Investment Strategies

MOTI can be a valuable addition to a diversified portfolio, particularly for investors seeking international exposure and long-term growth. Here are some strategic approaches to consider:

Long-term Investment Strategy

Given its focus on companies with strong competitive advantages, MOTI is best suited for long-term investors. Holding this ETF for a decade or more can provide exposure to sustained growth from high-quality international firms. This long-term horizon allows investors to navigate through periods of market volatility and benefit from the potential upside of economic moats.

Pairing with Domestic Funds

To create a balanced portfolio, consider combining MOTI with domestic ETFs such as SCHD or SPY. This strategy offers a blend of U.S. and international exposure, mitigating risks associated with any single market.

Opportunistic Rebalancing

Markets can be cyclical, and international sectors may underperform or outperform at different times. Regularly review and rebalance your portfolio to align with your investment goals and risk tolerance. Adjusting the allocation to MOTI based on global economic conditions can enhance portfolio performance.

Dividend Reinvestment

Though not primarily a dividend-focused ETF, MOTI does provide dividends from its holdings. Reinvesting these dividends can accelerate the compounding effect and contribute to long-term wealth accumulation.

Conclusion

MOTI offers an intriguing opportunity for investors seeking international diversification and exposure to high-quality companies with sustainable competitive advantages. While it has its risks, such as currency fluctuations and market volatility, the potential rewards make it a strong candidate for long-term portfolios. By employing thoughtful strategies, you can leverage MOTI to achieve your financial goals and enjoy the benefits of global investing.