Moat Stocks Outperform Amid AI Turmoil

In January, U.S. equity markets opened the year with a generally positive outlook, spurred by optimism about the new administration's policy directions. However, the month was not without its challenges as the emergence of China's DeepSeek artificial intelligence (AI) model led to significant volatility, particularly affecting tech giants like Nvidia, whose stock saw notable declines. This event, coupled with uncertainty around potential new tariffs and trade war narratives, introduced additional market fluctuations. Despite these concerns, the markets managed to recover, with broad gains across the major stock benchmarks. Positive labor indicators and relatively neutral commentary from the Federal Reserve helped stabilize investor sentiment, setting a cautiously optimistic tone for the year as policy direction and the economic landscape continued to evolve.

The Morningstar Wide Moat Focus Index (the “Moat Index”) outpaced the broader U.S. equity market in January. The Moat Index’s underweight to mega-cap technology, namely Nvidia, proved beneficial during the month as the market rerated companies linked to AI off the news surrounding cheap and competitive AI models out of China. Overweights in more value-oriented sectors like health care and industrials also contributed positively to the Moat Index’s relative performance in January.

Smaller U.S. stocks, particularly mid-caps, were also supported by the broadening in market performance that saw gains in areas beyond just large-cap technology. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) posted a notably strong return during month and outpacing the broad small- and mid-cap. The SMID Moat Index’s outperformance stemmed from strong stock selection rather than sector over or underweights during the month.

Moat Stocks Outperform in January Amid AI Turmoil

Source: Morningstar. Data as of 31/01/2025. 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.

Moat Index Highlights: Crops and Clinics Sprout Success

Sector allocations within the Moat Index were the primary drivers of outperformance versus the S&P 500 in January with an underweight in technology having the largest relative impact. Overweight exposure in health care was also a leading contributor to performance with three companies from the sector landing in the top contributors table for the month. At the same time, underweighting communication services and financials played a role in reducing overall return of the Moat Index.

Topping the list of January contributors was the agriculture materials company, Corteva (CTVA). Spun out from DowDuPont in 2019, Corteva is a global leader in the premium seed and crop protection markets that has built a wide economic moat thanks to its portfolio of patented biotech seeds and crop chemicals. Corteva’s proprietary seeds make crops resistant to damaging insects while also allowing farmers to spray more-effective chemicals to control weeds, ultimately driving improved crop yields and customer retention. Shares of Corteva gained nearly 15% during the month off the back of positive analyst ratings and price target increases by several research groups including Citigroup, Wells Fargo, and UBS. Morningstar currently places a $70 fair value estimate on Corteva shares and expects growing seed profits and a recovery in crop protection to be catalysts for the stock in 2025.

Also landing in the top contributors list and helping drive performance were several health care companies including leading life science diagnostic and research firm Agilent Technologies (A), medical imaging and ultrasound giant GE HealthCare Technologies (GEHC), as well as health information software provider Veeva Systems (VEEV). All three companies posted double digit price gains in January as the health care sector started off the new year strong following underperformance in 2024.

Companies detracting the most in January include us-based manufacturer of premium distilled spirits, Brown-Forman (BF), the well-known global parcel delivery company United Parcel Service (UPS), beer, wine, and spirits producer Constellation Brands (STZ), semiconductor equipment and materials company Teradyne (TER), and packaged food producer Campbell’s (CPB).

Top Contributors and Detractors from Moat Index - January 2025

Contributors

Source: Morningstar, January 2025. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

SMID Moat Index Highlights: Asbury Auto Drives Gains

The SMID Moat Index’s outperformance over small- and mid-cap broad benchmarks in January was the product of strong stock selection rather than sector over or underweights which in aggregate had minimal impact during the month. While overall effect was positive, it is worth noting that selection of consumer defensive stocks was less optimal.

The top contributor to performance in January for the SMID Moat Index was the small-cap Asbury Automotive Group (ABG). As its name implies, Asbury Automotive is a regional collection of U.S. automobile dealerships, operating in 15 states (mostly Texas, the West, the Mid-Atlantic, and the Southeast regions), with more than 150 new vehicle stores and dozens of collision and repair centers. Asbury’s moat rating stems from its larger size, relative to other dealers, which provides economies of scale and working capital efficiencies that drive pricing power versus smaller independent garages. Asbury shares were up over 20% during the month with most of those gains following its earnings release which posted record fourth-quarter revenue and earnings that surpassed analyst consensus estimates.

Other top January contributors include network security software company Cloudflare (NET), independent broker dealer and investment advisory services firm LPL Financial (LPLA), luxury fashion brand owner Tapestry (TPR), and the above discussed agriculture materials company, Corteva (CTVA).

Names that detracted most from performance during the month include travel services company Expedia Group (EXPE), automotive parts manufacturer Gentex (GNTX), semiconductor equipment and materials company Teradyne (TER), packaged food producer Campbell’s (CPB), as well as the resort and casino operator Las Vegas Sands (LVS).

Top Contributors and Detractors from SMID Moat Index - January 2025

Contributors

Source: Morningstar, January 2025. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

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 the moat companies:

VanEck Morningstar US Wide Moat UCITS ETF (MOTU): 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 US ESG Wide Moat UCITS ETF (MOAT): US wide moat rated companies that passed exclusion criteria according to the investment policy.

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

VanEck Morningstar Global Wide Moat UCITS ETF (GOAT): global wide moat rated companies.

Please be aware of risks, including the risk of investing in equities, US stocks, and the risk of investing in smaller companies. For full information on the risks, please refer to the prospectus and KID/KIID.

The value of the securities held by a Moat ETF may fall suddenly and unpredictably due to general market and economic conditions in markets in which issuers or securities held by the funds are active. Investors should read the prospectus and other relevant documents before making the decision to invest.

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