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Companies with structural competitive advantages earn more. 5 Sources of economic moats. Increased competition drives down profitability. The Market Vectors Morningstar International Moat ETF (NYSEARCA: MOTI ) can help investors diversify into international markets and potentially provide more attractive returns. MOTI may act as a strong core position as investors seek greater overseas exposure. On the recent webcast, Improve International Stock Selection , Dan Lefkovitz, Content Strategist for Indexes at Morningstar, pointed out that investors have been slowly shifting out of U.S. stocks and taxable bonds while putting more money into international equities. Looking at the rolling 12-month flows in open-end and ETF categories, international equity funds are attracting over $200 billion, whereas U.S. equity fund flows look slightly negative and taxable bond fund funds came in about $50 billion, according to Morningstar data. Many investors may have a home bias, solely allocating toward U.S. stocks. However, Lefkovitz also noted that the world stock market is more than the U.S. The developed world stock market capitalization, as of the end of 2014, stood at about 58.4% U.S. and 41.6% foreign markets, so a diversified international investment portfolio would include about 40% foreign assets when considering total market-cap exposure. Brandon Rakszawski, Product Manager at Van Eck Global, explains that MOTI, like the popular U.S.-focused Market Vectors Morningstar Wide Moat ETF (NYSEARCA: MOAT ) , tracks a proprietary Morningstar wide moat, smart-beta strategy in selecting international components. [ Wide Moat ETF Gets an International Counterpart ] “The Morningstar’s moat philosophy aims to identify companies with structural competitive advantages that are more likely to earn above-average returns on capital over a long period of time,” Rakszawski said. Specifically, the Morningstar Moat Focus Indices target companies with a wide economic moat or sustainable competitive advantages and focuses on the most undervalued moat stocks, which have helped generate significant excess returns relative to the overall market. According to Morningstar’s indexing methodology, there are five sources of economic moats: Intangible assets that include brand recognition to charge premium prices. Switching costs that make it too expensive to stop using a company’s products. Network effect that occurs when the value of a company’s service increases as more use the service. A cost advantage helps companies undercut competitors on pricing while earning similar margins. Lastly, efficient scale associated with a competitive advantage in a niche market. “Capitalism works,” Michael Hodel, Technology Strategist at Morningstar, said. “High profits attract competition. Competition reduces profitability, but some firms stay very profitable for a long time by creating economic moats to protect profits.” Hodel also added that the Wide Moat Focus and Global ex-US Moat Focus indices track “high quality companies trading at a discount to intrinsic value.” Moreover, the Morningstar Moat Focus targets wide moat companies that may sustain economic profits for at least 20 years, whereas a narrow moat company would only be able to sustain profits for about 10 years. The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.