Could this undervalued ASX stock be your ticket to millionaire status?

It’s a long-term dream of mine to be able to reach $1 million with my portfolio. There’s a few ASX stocks I’m backing significantly to help me reach millionaire status.

Long-time readers already know that I’m a big fan of names like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and MFF Capital Investments Ltd (ASX: MFF).

But, there’s one ASX stock I’ve started investing in that I think could also help me reach my goal. I’d be happy if it were already my biggest holding because of everything it offers: VanEck Morningstar Wide Moat ETF (ASX: MOAT).

Great moat investment strategy

This investment is an exchange-traded fund (ETF) that employs a strategy from Morningstar where analysts aim to identify US businesses that have strong economic moats. Moats can also be called competitive advantages.

There are a number of different advantages that businesses can have over rivals such as brand power, cost advantages, intellectual property, regulatory/license advantages, network effects and so on.

Those competitive advantages allow the business in question to earn stronger profits than it otherwise would have, making it a compelling business.

What Morningstar is particularly looking for are US businesses with wide economic moats. That means the competitive advantage is expected to almost certainly endure for a decade and more likely than not for two decades. I’m calling this an ASX stock because we can buy it on the ASX and it’s about stocks.

The MOAT ETF isn’t necessarily going to own a business for a full 20 years because there’s another element to the strategy.

Undervalued ASX stock

The reason why the MOAT ETF can be called undervalued is because the analysts only to decide to invest in/own one of these competitively-advantaged companies if the target companies are “trading at attractive prices relative to Morningstar’s estimate of fair value”.

In other words, these businesses must be trading cheaper than the analysts think they’re worth.

Buying undervalued, great businesses sounds like a winning strategy to me.

Returns and diversification

The MOAT ETF has done very well for investors over the long-term. In the past decade it has returned an average of 15.3% per year. That’s not guaranteed to continue of course, but I like its chances of delivering a long-term return that’s in the mid-teens in percentage terms.

The diversification of the fund is also appealing.

An investor doesn’t necessarily need to own a large portfolio of ASX stocks to be diversified – this fund usually owns around 50 names from a variety of sectors. That’s good diversification, in my view, but not too much where it might lower returns.

Compounding to millionaire status

Impressively, the MOAT ETF has delivered even stronger returns over the past three years and five years. If something compounds at an average of 15% per year, it doubles in five years.

If someone could invest $1,000 every month for the long-term and it grows at 15% per year, it’d become $1 million in less than 19 years, according to the MoneySmart compound interest calculator. That would be an incredible result.

I’ll be very happy to buy more of the MOAT ETF for my portfolio in the coming months, with a good mix of top ASX stocks too.

The post Could this undervalued ASX stock be your ticket to millionaire status? appeared first on The Motley Fool Australia.

More reading

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• 3 top ASX dividend share buys for passive income in December
• Where I’d invest $20,000 into ASX shares right now
• 3 ASX ETFs that could quietly make you rich over 20 years
• Buying these 3 ASX shares could change your life

Motley Fool contributor Tristan Harrison has positions in Mff Capital Investments, VanEck Morningstar Wide Moat ETF, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Mff Capital Investments and VanEck Morningstar Wide Moat ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.