The ETF Underdogs, Part 9: Wide Moats and Competitive Advantages

Baron Global Durable Advantage ETF

BCGD

+1.8%

The first ETF on the list is BCGD. Launched in December 2025, the fund currently manages just $7.3 million in assets as of March 31, 2026.

Like many of Baron Capital's strategies, BCGD is actively managed and built around a fairly straightforward objective: invest in large-cap growth businesses possessing durable competitive advantages and the ability to compound capital over long periods of time.

More specifically, Baron Capital seeks what it describes as high-quality compounders. Two of the firm's preferred metrics are high returns on invested capital (ROIC) and strong excess free cash flow generation.

ROIC is particularly important because it measures how efficiently a company converts invested capital into profits. Unlike return on equity (ROE), which can be boosted through leverage or share buybacks, ROIC evaluates the performance of the underlying business itself.

BCGD also takes a global approach. The fund is required to maintain at least 40% of assets outside the United States and invest across at least three countries. At the same time, the ETF is classified as non-diversified, meaning Baron Capital has considerable flexibility to concentrate capital in its highest-conviction ideas rather than spreading assets broadly across hundreds of holdings.

The resulting portfolio looks noticeably different from the S&P 500. Sector exposures are relatively balanced, but there are clear tilts. Technology currently represents a smaller weight than it does in the broad market, while financials and consumer discretionary receive larger allocations.

The holdings themselves provide a good illustration of what Baron Capital considers a durable advantage. While there is some Magnificent Seven exposure through Nvidia, Amazon, and Alphabet, the portfolio also includes businesses whose competitive positions are arguably among the strongest in the world.

Taiwan Semiconductor Manufacturing Company benefits from enormous scale, manufacturing expertise, and customer relationships that would take competitors years and hundreds of billions of dollars to replicate. ASML occupies a similarly unique position through its near monopoly on extreme ultraviolet lithography systems, equipment that has become essential to manufacturing cutting-edge semiconductors.

The portfolio also includes businesses whose moats are less technological but no less powerful. S&P Global benefits from regulatory entrenchment, brand recognition, and network effects in the credit ratings industry. CME Group operates one of the world's most important derivatives exchanges, benefiting from deep liquidity and market network effects.

Importantly, BCGD is not a closet index fund. As of March 31, 2026, the strategy reported an active share of 82.2%. Active share measures the percentage of a portfolio that differs from its benchmark index. An active share above 80% generally indicates a manager is making genuinely differentiated investment decisions rather than simply hugging an index while charging active fees.

Investors do pay for that discretion. BCGD carries a 0.75% expense ratio, which is fairly typical for a concentrated actively managed global equity strategy.

Tema Durable Quality ETF

TOLL

+0.95%

Competing against BCGD is TOLL, a smaller actively managed fund with roughly $47 million in assets and a 0.55% expense ratio. The portfolio currently consists of 38 holdings selected according to Tema's definition of businesses with "tangible, dominant, and durable" competitive advantages.

Some of these advantages overlap with the traditional Morningstar moat framework. Economies of scale, network effects, and switching costs all make appearances. However, Tema expands the definition of durability beyond what Morningstar typically considers, focusing on two additional categories: regulation and ownership of non-replicable physical assets.

While regulation is often viewed as a business risk, it can also serve as a formidable barrier to entry. Pharmaceutical companies provide a useful example. Bringing a new drug to market typically requires years of clinical testing and approval from the U.S. Food and Drug Administration (FDA).

Established firms with large research budgets, existing manufacturing capacity, and regulatory expertise are often better positioned to navigate this process. Over time, these advantages can allow incumbents to consolidate market share, acquire emerging competitors, and reinforce their competitive positions.

The second category is ownership of non-replicable physical assets. These are assets that cannot easily be recreated due to geography, economics, permitting requirements, or political constraints.

Railroads are a classic example after consolidation eventually left a small number of dominant operators controlling vast rail networks. Building a competing network today would require enormous capital expenditures and face significant regulatory and political hurdles. As a result, existing operators continue to benefit from barriers that few new entrants can realistically overcome.

From a portfolio perspective, TOLL currently maintains a strong U.S. bias, with 83.2% of assets invested in American companies. Technology represents the largest sector allocation at 38.6%. Because the strategy is actively managed, these exposures can change materially over time.

What stands out, however, is the combination of quality and valuation metrics. Tema reports a portfolio-wide return on equity of 21.5%, an indication of strong underlying profitability. At the same time, the portfolio trades at 21 times earnings, which is modestly below the valuation multiple currently associated with the broader S&P 500.

One of the more unusual aspects of the ETF is its largest position. TOLL currently maintains an 8.6% allocation to prediction market operator Kalshi through a special purpose vehicle (SPV). This exposure is subject to SEC liquidity regulations that limit illiquid investments to a maximum of 15% of fund assets.

While still a relatively small portion of the portfolio, the position is notable because Kalshi operates in what is effectively a duopoly alongside Polymarket, giving investors exposure to a rapidly developing segment of financial markets that remains largely inaccessible through traditional public equities.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision