Moat Stocks Steady Amid Tech's Market Surge

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As U.S. equities climbed, Morningstar’s Moat Index kept its value bias, offering a diversifier from concentration risk and the SMID Moat Index shifted from tech to materials and utilities as it seeks valuation opportunities.

U.S. equities climbed higher in June as the S&P 500 posted its seventh positive month out of the last eight. The broad market index rose more than 3% during the month to cap off what has been a strong first half of 2024. Notably though, and characteristic of what we have seen all year, June’s gains were once again top-heavy, with just a handful of mega-cap tech names driving the majority of market performance. The Magnificent 7 (NVIDIA, Microsoft, Apple, Google, Tesla, Meta and Amazon) make up about 30% of the S&P 500 and have accounted for 60% of the index’s performance so far this year. Further illustrating this lopsided market is the equal-weighted S&P 500, which was down half a percent in June and is trailing the market cap-weighted variant by 10 percentage points year to date.

The Morningstar Wide Moat Focus Index (the “Moat Index”) finished flat during June, trailing the broader market but finishing ahead of the equal-weight S&P 500 Index. Driving underperformance was the Moat Index’s current value bias and structural underweight to the Magnificent 7, which comprises only 4.5% of the Moat Index by way of Alphabet, Amazon and Microsoft. The Index’s differentiated exposure, while susceptible to periods of underperformance at times, has historically provided impressive long-term performance and can serve as a useful diversifier away from the concentration risk present in today’s market.

Companies on the smaller end of the market cap spectrum were notable laggards in June, with small- and mid-cap benchmarks down 2.38% and 1.58% during the month, respectively. The Morningstar U.S. Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) fared slightly better, down only 98 basis points during the month. The higher for longer interest rate regime has weighed on small-cap performance so far this year, but the expected commencement of easier monetary policy in the second half of the year may put some wind at the back of this cohort.

Mega-cap Tech Dominated Indexes Lead at the Half | As of 6/30/2024

Moat Index Quarterly Review Highlights: Staying the Course as Valuations Lead the Way

Both the Moat and SMID Moat Indexes underwent quarterly reviews on June 21, 2024. Each quarter, they systematically target the most attractively priced, high quality U.S. companies within their respective universes. Below are a few takeaways from the reviews and how the indexes are now positioned. Full results of the most recent quarterly reviews are available here: Moat Index and SMID Moat Index.

Additionally, in our recent moat investing webinar, we provided more information on current positioning and recent performance, and members of Morningstar’s equity research team shared their perspectives on market trends and the companies they cover.

The Moat Index entered 2024 with a contrarian bias toward large cap stocks (as opposed to the mega caps that dominate the S&P 500 Index) and a very slight value posture. That bias has remained through the first two quarterly reviews of the year. The Moat Index remains notably underweight growth stocks relative to the S&P 500, with core stocks that exhibit characteristics of both growth and value making up much of the difference. The recent exposure has reflected the valuation opportunities in the U.S. market among high quality, wide moat companies as the Index’s systematic, rules-based process avoids the tendency to follow the crowd.

From a sector perspective, Financials exposure was reduced on the heels of a strong quarter (or strong several quarters in some cases) from banks. Allocations to Bank of America, Bank of New York Mellon, Charles Schwab and Wells Fargo were all removed or reduced. Offsetting the reduced Financials exposure were increases to areas like Consumer Staples, Industrials and Technology. Despite the increase in technology names, which came by way of software companies like Adobe, Autodesk and Fortinet, the sector still sits at a notable 14% underweight relative to the S&P 500.

Moat Index Sector Shifts Following 2Q 2024 Review

U.S. Equity Exposure Without the Lofty Valuations

The price/fair value ratio of the S&P 500 Index currently sits at 1.05. This implies that the companies in the S&P 500 are, overall, trading at approximately a 5% premium, according to Morningstar. This presents a challenge for investors looking to deploy cash into U.S. markets that have already appreciated by more than 15% this year. The Moat Index represents high quality companies currently mispriced by the market, in Morningstar’s view. It allows investors to consider a mix of well-positioned companies with upside potential. Currently, the Morningstar price/fair value ratio of the Moat Index is 0.81, implying a 19% discount to fair value.

SMID Moat Index Highlights: Materials and Utilities Replace Expensive Tech

In the latest quarterly update, the shift in the SMID Moat Index saw a notable reallocation from expensive technology stocks to more traditional sectors like Materials and Utilities. Technology stocks experienced the most substantial sector change, decreasing by 3.9%, with nine companies, of which five were semiconductor companies, exiting the index. As a result, technology’s representation in the index has reduced to 12%, which is slightly below the sector’s weight in the Russell 2500 index.

Conversely, the Materials and Utilities sectors witnessed increases, rising by 2.2% and 1.5%, respectively. New additions to the index include prominent companies like Scots Miracle-Gro, Corteva, WEC Energy, and Portland General Electric, among others. Following these additions, Materials and Utilities now represent 9% and 7% of the index, positioning them as overweights when compared to their presence in the Russell 2500. At the industry level, Electric Utilities have emerged as the largest overweight, contrasting with Regional Banks and Biotech, which are now the most significant underweights.

SMID Moat Index Sector Shifts Following 2Q 2024 Review

Valuation Opportunity within SMID Moats

The weighted average price-to-fair value of the SMID Moat Index fell from 0.83 to 0.80 following the June review, signaling a 20% discount to Morningstar’s fair value estimate. The broad-based Russell 2500 Index featured fairly priced valuations with a weighted average price-to-fair value ratio of slightly over 1.00, as of the same date.

Choose Your Moat Strategy

VanEck’s suite of moat investing strategies is powered by Morningstar’s equity research team, which seeks quality companies trading at attractive valuations. The below ETFs offer access to U.S. moat companies:

VanEck Morningstar Wide ETF (MOAT): companies with a wide moat rating, which means Morningstar believes the company is likely to sustain its competitive advantage for at least the next 20 years.

VanEck Morningstar SMID Moat ETF (SMOT): small and mid-cap moat companies.

VanEck Morningstar Wide Moat Growth ETF (MGRO): wide moat companies within Morningstar’s growth style category.

VanEck Morningstar Wide Moat Value ETF (MVAL): wide moat companies within Morningstar’s value style category.

Important Disclosures

Source for all data unless otherwise noted: Morningstar.

Fair value estimate: the Morningstar analyst’s estimate of what a stock is worth. Price/Fair Value: ratio of a stock’s trading price to its fair value estimate.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: MOAT – VanEck Morningstar Wide Moat ETF – Holdings.

Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: SMOT – VanEck Morningstar SMID Moat ETF – Holdings.

Holdings will vary for the MVAL ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: MVAL – VanEck Morningstar Wide Moat ETF – Holdings.

Holdings will vary for the MGRO ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: MGRO – VanEck Morningstar Wide Moat Growth ETF – Holdings.

An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

The Morningstar® Wide Moat Focus IndexSM and Morningstar® U.S. Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® U.S. Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc

The Morningstar® U.S. Broad Value Wide Moat Focus IndexSM and Morningstar® U.S. Broad Growth Wide Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat Value ETF and VanEck Morningstar Wide Moat Growth ETF and bears no liability with respect to the Funds or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® U.S. Broad Value Wide Moat Focus IndexSM and Morningstar® U.S. Broad Growth Wide Moat Focus IndexSM are service marks of Morningstar, Inc.

Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.

The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.

The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar’s equity research team.

The Morningstar® U.S. Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar’s equity research team.

Morningstar® U.S. Broad Value Wide Moat Focus IndexSM: consists of at least 30 U.S. value-oriented companies identified as having sustainable, competitive advantages, and whose stocks are the most attractively priced, according to Morningstar.

Morningstar® U.S. Broad Growth Wide Moat Focus IndexSM: consists of at least 30 U.S. growth-oriented companies identified as having sustainable, competitive advantages, and whose stocks are the most attractively priced, according to Morningstar.

The S&P SmallCap 600 Index represents small-cap U.S. companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized U.S. companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector. The S&P 500 Equal Weighted Index which is an equally weighted version of the market-cap weighted S&P 500 Index.

The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, risks related to investing in equity securities, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.

An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.

An investment in the VanEck Morningstar Wide Moat Value ETF (MVAL) may be subject to risks which include, among others, risks related to investing in equity securities, value style investing, financials sector, health care sector, industrials sector, large- and medium-capitalization companies, market, operational, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Large- and medium-capitalization companies may be subject to elevated risks. The Fund’s value strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole. Furthermore, the value companies identified by the Index provider may not operate as expected, and there is no guarantee that the index provider’s proprietary valuation model will perform as intended.

An investment in the VanEck Morningstar Wide Moat Growth ETF (MGRO) may be subject to risks which include, among others, risks related to investing in equity securities, growth style investing, consumer discretionary sector, industrials sector, financials sector, large- and medium-capitalization companies, health care sector, information technology sector, market, operational, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risk, all of which may adversely affect the Fund. Large- and medium-capitalization companies may be subject to elevated risks. The Fund’s growth strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole. Furthermore, the growth companies identified by the Index provider may not operate as expected, and there is no guarantee that the index provider’s proprietary valuation model will perform as intended.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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