Moat Strategies Reposition for 2025 Amid December Dip

In December, U.S. equity markets ended the year on a mixed note, with a decline of the S&P 500 Index . The Federal Reserve's (Fed’s) more hawkish tone on rate cuts and an upward revision in inflation expectations led to investor apprehension about monetary policy going forward. Despite this downturn, the Nasdaq Composite bucked the trend driven by continued resilience in the technology sector. The Dow Jones Industrial Average saw a steeper decrease, signaling broader market jitters over higher interest rates persisting into 2025. Nonetheless, optimism heading into the new year remained, given expected policy changes under the new administration, setting the stage for a more positive outlook to start 2025. However, it is important to note that continued inflationary pressures and the Federal Reserve's stance on interest rate hikes could contribute to elevated market volatility in 2025.

The Morningstar Wide Moat Focus Index (the “Moat Index”) retreated along with the broad U.S. equity market in December, falling stronger during the month than the S&P 500 Index. Like much of the year, the Moat Index’s equal- weight and valuation conscious methodology proved a headwind in a market environment dominated by the narrow leadership of a few mega-cap tech names. However, when compared versus the equal-weight variant of the S&P 500, the Moat Index found areas of comparative strength leading to outperformance during the month.

After posting their best month of the year in November, smaller U.S. stocks declined considerably in December following the Fed’s hawkish statements on policy, suggesting a slower pace for rate cuts in 2025 than previously anticipated. The broad small- and mid-cap benchmarks fell abruptly during the month while the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) faired a bit better. On the year, performance dispersion between large- and small-caps remains notable, offering compelling valuation opportunities for long-term investors looking to rotate capital in the new year.

Stocks Close Strong Year with a December Dip

Source: Morningstar. Data as of 31/12/2024. 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.

Moat Strategies Positioning for 2025

Both the Moat and SMID Moat Indexes underwent quarterly reviews on December 20, 2024. Each quarter they systematically target the most attractively priced, high quality U.S. companies within their respective universes. Key takeaways from the December review and how the Moat Index is positioned to start the new year can be found in our recent blog covering the review. Full results of the quarterly reviews are also available here: Moat Index and SMID Moat Index.

Additionally, in our moat investing webinar, we provide more information on current positioning and recent performance, and members of Morningstar’s equity research team share their perspectives on market trends and the companies they cover. View the webinar here: Beyond Big Tech: A Fresh Look at Equity Exposure.

Investors should consider that the focus on valuation methodologies could lead to underperformance in markets driven by narrow leadership or tech dominance, which has characterized recent trends.

Moat Index December Highlights: Boeing Shares Liftoff

Sector allocations within the Moat Index were the primary drivers of relative performance versus the S&P 500 in December with an underweight in technology having a noted negative impact. Overweights in health care and industrials also detracted. However, strong stock selection within these areas helped offset the negative allocation effect.

One of those beneficial stock selections was well-known aerospace and defense giant Boeing Co. (BA), which was the top contributor to performance in December. Boeing has taken investors for a turbulent ride in recent years with groundings and safety concerns around their 737 MAX jets as well as issues with their Starliner capsule, which stranded two U.S. astronauts on the International Space Station earlier this year. However, Boeing was aided by good news in December with the reopening of the Chinese market to Boeing’s airplanes, as well as the announcement of a significant 100 jet purchase order from Pegasus Airlines. While Boeing shares soared during the month, gaining more than 13%, on the positive news, they remain attractively priced relative to Morningstar’s fair value estimate of $191 per share.

Also within the top contributors list for December are two Magnificent Seven names, Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN), which saw share price gains of 12% and 5.5%, respectively, during the month. Despite the Moat Index’s structural underweight to the mega-caps that dominate broad market strategies, most of the Mag Seven are wide-moat companies and are eligible for inclusion in the index if Morningstar views their relative valuations as attractive. GOOGL’s increased weighting during the December review, as it traded modestly below its $220 fair value estimate, is a recent example. Other top contributors include semiconductor testing equipment manufacturer Teradyne (TER) and the global leader in premium beauty products, Estee Lauder (EL).

On the opposite end, companies detracting the most in December include electronic bond trading platform operator MarketAxess Holdings (MKTX), document and design software firm Adobe (ADBE), consumer health and personal products company Kenvue (KVUE), the regional banking branch U.S. Bank (USB), and consumer credit bureau TransUnion (TRU).

Top Contributors and Detractors from Moat Index - December 2024

Leading Contributors

Leading Detractors

Source: Morningstar, December 2024. 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.

While sector allocations contributed positively in December, the underweight in technology and overweights in health care and industrials expose the Moat Index to potential sector-specific risks, including regulatory challenges and supply chain constraints.

SMID Moat Index December Highlights: Cloudflare’s Cyber Edge

The SMID Moat Index’s lead over small- and mid-cap broad benchmarks in December was driven by a combination of strong stock selection and favorable sector exposure with overweights in technology and communication services, as well as an underweight in industrials being the most additive allocations.

Topping the list of leading contributors in December was web security and performance software company Cloudflare Inc. (NET). Morningstar views Cloudflare as well-positioned to succeed in both cybersecurity and edge computing, leveraging its role as a leading content delivery network that handles over 10% of global internet traffic and supports more than a quarter of the world’s websites. With growing demand for cybersecurity amid rising cyberattacks, Cloudflare is poised to capitalize on the trend, while also exploring edge computing as large enterprise companies look to manage their data- related workflows. Shares of NET ended December up nearly 8% over the last month and more than 30% over the last three months.

Other top contributors include online video game and multimedia platform operator Roblox (RBLX), luxury fashion and accessory brands parent company Tapestry (TPR), semiconductor testing equipment manufacturer Teradyne (TER), and hotel and resort operator Wyndham (WH). Names that detracted most from the SMID Moat Index performance during the month include ride-sharing service provider Lyft (LYFT), recreational marine vehicle manufacturer Brunswick Corp. (BC), advertising services firm Omnicron Group (OMC), industrial and electrical distributor WESCO International (WCC), and home lawn and gardening products company Scotts Miracle Gro (SMG).

Top Contributors and Detractors from SMID Moat Index - December 2024

Leading Contributors

Leading Detractors

Source: Morningstar, December 2024. 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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