MOAT’s Future Focus: Beyond AI and Short-Term Setbacks
17 June 2024
Read Time 4 MIN
The Morningstar Wide Moat Focus Index (“Moat Index”) ended May trailing the S&P 500 Index by nearly 9% thus far in 2024. Several headwinds have influenced this short-term underperformance, not least of which was the momentum behind the generative AI trade. Here we will touch on these headwinds and put them into longer-term context.
Year to Date Return | as of 31 May 2024
| YTD Return (%) | |
| Moat Index | 2.34 |
| S&P 500 Index | 11.30 |
| Morningstar US Market Index | 10.48 |
Source: Morningstar. 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.
Key Moat Index Performance Drivers
- Nvidia & Generative AI Hype: Through May, Nvidia has accounted for approximately one third of the S&P 500 Index’s return. That is worth repeating: one company out of 500 accounts for 33% of the S&P 500’s return. With no exposure to Nvidia in 2024—due to Morningstar’s assessment that the stock has generally been priced at a premium to fair value—approximately 36% of the Moat Index’s underperformance has come from its lack of Nvidia.
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Equal Weighting: The Moat Index’s equal weighting methodology has proven a headwind relative to market cap weighted approaches because of very low market breadth (i.e., a small number of companies are accounting for much of the market’s returns). While we’ve seen brief periods in 2024 when market breadth has increased, by and large a select few companies have accounted for most of the market’s returns. The Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) accounted for more than 50% of the S&P 500 Index’s YTD returns—and that includes disappointing starts to the year from Tesla and Apple. Excluding these two laggards, nearly 60% of the S&P 500 YTD returns are explained by the remaining Magnificent 5 companies.
The S&P 500 Equal Weighted Index is now trading at levels relative to the market cap-weighted S&P 500 Index that haven’t been seen since the Global Financial Crisis.
Lack of Breadth: S&P 500 Equal Weighted Index Price vs. S&P 500 Index Price | 20 Years as of 31/05/2024
Source: BofA Global Investment Strategy; Morningstar; Represents share price of leading S&P 500 Equal Weighted Index ETF vs. S&P 500 Index ETF.
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Stock Selections: several stocks in the Moat Index have posted disappointing returns in 2024 in the face of both idiosyncratic headwinds and macro-driven concerns. That is not to say that others have not performed well.
Bottom 5 Performing Moat Index Overweight Stock Picks vs. S&P 500 Index
| Company | Ticker | Moat Index Weight Relative to S&P 500 (%) |
Return in Moat Index (%) | Contribution to YTD Moat Index Return (%) |
| MarketAxess | MKTX | 2.21 | -31.61 | -0.90 |
| Etsy | ETSY | 2.23 | -21.69 | -0.56 |
| Gilead Sciences | GILD | 2.02 | -19.84 | -0.50 |
| Estee Lauder | EL | 2.25 | -14.84 | -0.36 |
| Biogen | BIIB | 2.16 | -13.07 | -0.31 |
Top 5 Performing Moat Index Overweight Stock Picks vs. S&P 500 Index
| Company | Ticker | Moat Index Weight Relative to S&P 500 (%) |
Return in Moat Index (%) | Contribution to YTD Moat Index Return (%) |
| Teradyne | TER | 2.63 | 30.14 | 0.78 |
| RTX Corp | RTX | 2.38 | 29.76 | 0.71 |
| Walt Disney Co | DIS | 1.60 | 15.08 | 0.50 |
| International Flavors & Fragrances | IFF | 2.59 | 19.35 | 0.50 |
| Wells Fargo | WFC | 1.66 | 23.31 | 0.52 |
Source: Morningstar. YTD data as of 31/05/2024. 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. This is not a recommendation to buy, sell or hold any securities mentioned herein. Securities may or may not be part of a VanEck fund‘s portfolio.
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Momentum: the Moat Index allocates to those wide moat stocks with attractive valuations. Often, attractive valuations correspond with preceding price declines and, as such, the Moat Index tends to have a negative relationship to the momentum factor. This has been challenging in 2024 as momentum has been the top performing traditional factor this year.
Performance in Context
The Moat Index offers investors differentiated, core US equity exposure that has historically provided impressive long-term upside and downside characteristics. However, because it is differentiated, it can be susceptible to periods of underperformance.
While the discomfort of 2024 underperformance is palpable, this is not necessarily out of the ordinary. There have been several similar periods in recent history, all with notable outcomes.
MOAT Index Performance Relative to the Morningstar US Market Index
| Time Period | Relative Performance (%) |
Length | Date Range | Subsequent 1 Yr Excess Return (%) |
Subsequent 3 Yr Excess Return (%) |
| YTD 2024 | -8.14 | 5.0 Months | 01/01/2024 – 31/05/2024 | TBD | TBD |
| Late 2020 | -10.46 | 5.0 Months | 08/06/2020 – 06/11/2020 | 5.02 | 14.26 |
| Late 2021 | -8.81 | 5.8 Months | 10/06/2021 – 29/11/2021 | 6.15 | 6.31 |
| Late 2017 | -5.31 | 4.2 Months | 03/07/2017 – 06/11/2017 | 5.31 | 4.10 |
Source: Morningstar. As of 31/05/2024. 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.
Taking this concept one step further, the Moat Index has a long-term history of posting impressive relative returns following periods of underperformance. This is a testament to the long-term nature of the strategy and illustrates that it can take time for the market to realize the true value of undervalued stocks. In the example below, the Moat Index has posted impressive excess returns, on average, in the one and three-year periods following six month stretches of notable underperformance.
MOAT’s Index Has Outperformed, on Average, Following Periods of Underperformance
Source: Morningstar. 28/02/2007 – 31/03/2024. 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.
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IMPORTANT INFORMATION
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
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The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Morningstar US SMID Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Morningstar Global Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
Germany - Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
France - Facility Agent: VanEck (Europe) GmbH
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH
The Morningstar® Wide Moat Focus IndexSM are service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck Morningstar US Wide Moat UCITS ETF (the “ETF”) is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETF.
Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck Morningstar US SMID Moat UCITS ETF (the “ETF”) is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETF.
The S&P 500 Index (“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 © 2020 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.
It is not possible to invest directly in an index.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
Germany - Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
France - Facility Agent: VanEck (Europe) GmbH
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH
Morningstar® US Sustainability Moat Focus Index is a trade mark of Morningstar Inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Sustainable Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in VanEck Morningstar US Sustainable Wide Moat UCITS ETF.
Effective December 17, 2021 the Morningstar® Wide Moat Focus IndexTM has been replaced with the Morningstar® US Sustainability Moat Focus Index.
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.
It is not possible to invest directly in an index.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
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