DASH - Half-Time Heroes: Moat Stocks Lead As Second Half Kicks Off

2023-07-13 03:35:00 ET

Summary

• Morningstar’s strategy of focusing on quality companies at attractive prices has powered its Moat Index to its strongest first-half performance since 2007, putting it ahead of the S&P 500.
• The first half of the year is officially complete, and this lopsided tech rally is possibly becoming one of the most hated bull markets in history.
• U.S. equities have refused to slow down despite debt ceiling angst, regional banking fears, continued tightening credit conditions, and a commercial real estate market teetering on the edge.

Morningstar’s strategy of focusing on quality companies at attractive prices has powered its Moat Index to its strongest first-half performance since 2007, putting it ahead of the S&P 500.

The first half of the year is officially complete, and this lopsided tech rally is possibly becoming one of the most hated bull markets in history. U.S. equities have refused to slow down despite debt ceiling angst, regional banking fears, continued tightening credit conditions, and a commercial real estate market teetering on the edge.

In the face of these concerns, the Nasdaq registered its strongest first-half performance in 40 years with a gain of over 31%. Additionally, Apple ( AAPL ), the world's most valuable company, closed above the $3 trillion market capitalization mark for the first time.

The Morningstar Wide Moat Focus Index (the “Moat Index”) has also recorded a strong first half - its strongest since its inception in 2007 - gaining over 23% year-to-date as of the end of June. This performance puts it ahead of the S&P 500 Index by more than 600 basis points.

While smaller-cap companies rebounded in June, they still remain behind large caps in terms of year-to-date performance. However, the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) ended June ahead of both the small- and mid-cap broad benchmark indexes for the month- and year-to-date periods.

Moat Indexes Lead Broad Equity Markets at the Half

Source: Morningstar. As of 6/30/2023 . Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

MOAT ETF Stands Out Among Peers Thanks to Quality Stock Selection

Over its 11+ year history, the VanEck Morningstar Wide Moat ETF ( MOAT ) , which seeks to track the Moat Index, has delivered historical outperformance, versus both broad market indexes and actively managed strategies, through various market environments and across investing styles.

According to Morningstar, MOAT ranks in the top 1% for 5- and 10-year periods and the top decile for 1- and 3-year periods among Large Blend funds ^* (please see Morningstar ratings disclosures below).

The key to this success has been Morningstar’s robust equity research process and a disciplined approach that targets quality companies with attractive valuations through a forward-looking approach.

Additionally, MOAT has provided access to this time-tested investment philosophy for a cost well below the typical fee charged by large blend fund managers.

June Index Reconstitution

Both the Moat and SMID Moat Indexes underwent quarterly reviews on June 16, 2023. Each quarter they systematically target the most attractively priced U.S. moat companies within their respective universes. Below are a few takeaways from the June reviews and how the indexes are positioned heading into the second half of the year.

Moat Index Highlights

So Long Tech, Until We Meet Again

The Moat Index saw its technology exposure increase to the largest overweight in quite some time at the end of 2022, following the drastic declines in valuations for the sector. Now, with the incredible rally that many of these companies experienced in the first half of the year, their valuations have become too lofty.

Similar to the tech profit taking during the March review, the Moat Index continued that trend this quarter, locking in further gains in tech and shifting exposure to other areas of the market with more attractive valuations.

The reduced exposure this review came by way of software companies and semiconductor companies . Technology exposure in the Moat Index moved from market weight to a notable underweight, about 7%, relative to the S&P 500 Index.

Hello Heath Care and Financials

Health care and financials were the primary beneficiaries from the above-mentioned valuation-driven shift away from technology names. From the health care sector, the new additions are from the biotech, pharmaceutical, and life sciences sub-industries.

These additions include Gilead Sciences ( GILD ), Pfizer ( PFE ) and Agilent Technologies ( A ), among others. On the financials side, names added to the index include Bank of America ( BAC ), Charles Schwab ( SCHW ), The Bank of New York Mellon ( BK ), and MarketAxess ( MKTX ). Health care and financial exposures now represent slight overweight’s relative to the S&P 500 Index.

Growth Exposure Pared by More than 10%

The Moat Index’s shift away from tech, to traditional value-oriented sectors like financials and health care, resulted in a notable reduction to growth exposure.

Value and core companies equally picked up exposure within the index. Core stock exposure is the largest in the Index followed by growth and then value. Value is now slightly overweight relative to the S&P 500 Index, core is notably overweight and growth exposure is more than a 13% underweight.

Source: Morningstar. As of 6/16/2023 .Not intended as a recommendation to buy or sell any securities mentioned herein. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

Valuations Remain Attractive

The weighted average price-to-fair value of the Moat Index fell from 0.85 to 0.81 following the June review, signaling a 19% discount to Morningstar’s fair value estimate. This is in contrast to the S&P 500 Index, which featured a weighted average price-to-fair value ratio of 0.98 as of the same date.

SMID Moat Index Highlights

The Rise of the Consumer

This quarterly review of the SMID Moat Index saw a notable increase to consumer discretionary names with the addition of nine companies from the sector.

Many of these additions are beaten down retail names including Bath & Body Works ( BBWI ), Etsy Inc. ( ETSY ), Williams-Sonoma ( WSM ), Burlington Store ( BURL ) and Best Buy Co. ( BBY ).

The remaining consumer discretionary names added were a mix of hotel, restaurant, and automobile companies like Domino’s Pizza ( DPZ ), Harley-Davidson ( HOG ), DoorDash ( DASH ) and Aptiv ( APTV ).

Many of these names were among those with the lowest price-to-fair value entering the index this quarter, signaling potential deep valuation opportunities.

The consumer discretionary sector is now the largest overweight in the SMID Moat Index, about +10%, relative to the broad Morningstar US SMID Index (the “Broad SMID Index”).

Other overweights include the communication services (+4%) and the industrials (+2.5%) sectors. On the other end of the spectrum, the real estate and utilities sectors account for the largest under weights with exposures both about 6% less relative to the Broad SMID Index.

Growth Exposure Increases, But Remains an Underweight

Contrary to the Moat index, which saw growth exposure pared back by more than 10% this quarter, the SMID Moat Index’s review led to a slight increase to growth exposure.

Despite the increase, the SMID Moat Index still remains underweight growth compared to the broad SMID universe. It is worth noting that growth is much less dominant in the broader small-mid cap universe compared to the large cap space. Growth only makes up about 28% of Morningstar’s broad SMID index while making up about 40% of the S&P 500 Index.

Source: Morningstar. As of 6/16/2023 .Not intended as a recommendation to buy or sell any securities mentioned herein. Broad SMID Index refers to the Morningstar US Small-Mid Cap Index, is a broad-based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

SMID Moat Valuations Remain Attractive

The weighted average price-to-fair value of the SMID Moat Index fell from 0.78 to 0.76 following the June review, signaling a 24% discount to Morningstar’s fair value estimate. This is in contrast to the Morningstar US Small-Mid Cap Index, which featured a weighted average price-to-fair value ratio of 0.97 as of the same date.

Accessing Moat Stocks

VanEck Morningstar Wide ETF ( MOAT ) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

VanEck Morningstar SMID Moat ETF ( SMOT ) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Small-Mid Cap Moat Focus Index.

Important Disclosures

Source for all data unless otherwise noted: Morningstar.

^* Morningstar Ratings: When applicable, ratings shown when the ETF is rated three stars or more for any given period. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics.

© Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

For the periods ending May 31, 2023, the VanEck Morningstar Wide Moat ETF Morningstar Overall, 5-, and 10-year ratings are 5 stars and its 3-year rating is 4 stars. Overall Rating is based out of 1,281 funds in the Large Value category. The Fund ranked #12 out of 1,421 funds for 1 year, #102 out of 1,281 funds for 3 years, #6 out of 1,178 funds for 5 years and #6 out of 874 funds for 10 years. For each fund with at least a 3-year history, Morningstar calculates a Morningstar Rating ^TM based on a Morningstar Risk-Adjusted Return measure that accounts for variations in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance.

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: https://www.vaneck.com/us/en/investments/morningstar-wide-moat-etf-moat/holdings/

Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/us/en/investments/morningstar-smid-moat-etf-smot/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 Index ^SM and Morningstar ^® US Small-Mid Cap Moat Focus Index ^SM 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 Index ^SM and Morningstar ^® US Small-Mid Cap Moat Focus Index ^SM 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 Index ^SM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.

The Morningstar ^® US Small-Mid Cap Moat Focus Index ^SM 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.

The Morningstar ^® US Small-Mid Cap Index ^SM is a broad based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar.

The S&P SmallCap 600 Index represents small-cap US companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized US companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.

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 © 2023 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.spdji.com. 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, consumer discretionary sector, 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, 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. Small- and medium-capitalization companies may be subject to elevated risks.

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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