Moat Index 3Q Reconstitution: US Equity Exposure Without the Lofty Valuations

Marketing Communication

The Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) underwent its quarterly review on September 20, 2024. The Index’s review process systematically targets attractively priced, high quality U.S. companies, as identified by Morningstar’s equity research analysts. Below are a few key takeaways from the September review and how the Moat Index is positioned amid the major shifts in economic policy. The full review results are available here: 3Q 2024 Index Reconstitution.

Takeaways: Sector Biases, Value Posture Remains but Shrinks, Avoid Pricey Mega Caps

• More of The Same: Industrials Remain Top Overweight, Tech Top Underweight

  Despite seeing 14 stock positions change during the September review, the Moat Index maintained notably similar sector positioning relative to the S&P 500 with an overweight to industrial stocks filling in for the sizable underweight to the tech sector. Within tech, exposure comes primarily in the form of software companies and pockets of opportunities in the semiconductor segment.

• Value Posture in Effect as Growth-Dominated Market Continues its Climb

  The S&P 500 Index, widely owned by investors of all types by way of index funds, has reached new all-time highs in September 2024 following the Fed’s first rate cut of the cycle. As mega caps continue to dominate its makeup and its returns, the S&P 500’s growth dominance remains on full display. The Moat Index’s contrarian nature has led its exposure toward attractively priced companies which has resulted in a value bias relative to the headline large cap index. Though this overweight to value stocks has reduced slightly this quarter, several first time index constituents were added at this quarter’s review reaffirming this value posture:

  Air Products and Chemicals (APD): Long-time supplier of industrial gases that benefits from switching costs as customers are often willing to pay a premium for commodities products in order to lock in long-term contracts with reputable suppliers to ensure no interruption in service. APD was upgraded to a wide moat rating in April 2024 making it eligible for the Moat Index.

  GE HealthCare Technologies (GEHC): A leader in medical imaging led by their intangible assets, GEHC was spun out from General Electric in January 2023 allowing the firm to operate independently and streamline its focus on core competencies. Morningstar began covering GEHC in July 2024 with an initial wide moat rating.

  Idex Corporation (IEX): Another example of a long-standing industrial company recently upgraded to wide moat, IEX provides a wide array of equipment that is often mission-critical for its customers. This leaves no room for sustained product failures and affords the firm a notable switching costs source of moat.

  NXP Semiconductor (NXPI): NXP is one of the largest suppliers of semiconductors to the automotive market and its wide moat stems from intangible assets around proprietary analog and mixed signal chip design and manufacturing expertise. From a segment of a sector largely trading at premiums to fair value, NXPI offers a compelling valuation story as it has traded around a 25% discount to Morningstar’s fair value estimate in recent weeks.

  Otis Worldwide (OTIS): The leading global elevator and escalator original equipment manufacturer is entering the index for the first time since earning a wide moat rating from Morningstar in 2020. While it doesn’t trade at the steep discount of some other Moat Index companies, Morningstar projects robust earnings growth in the coming decade despite macro headwinds making this wide moat company an attractive addition.

  United Parcel Service (UPS): UPS has earned Morningstar’s exclusive wide moat rating for more than twenty years but has yet to be included in the Moat Index, until now.

• 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 are, again, reaching all-time highs. 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 0.86, implying a 14% discount to fair value.

3Q 2024 Moat Index Review Results

Sector Shifts Following 3Q 2024 Review

Sector Exposure Relative to S&P 500 Index

Style Exposure Relative to S&P 500 Index: Value Bias Persists

Source: Morningstar. As of 20/09/2024 unless otherwise noted.

Access Quality Companies and Attractive Valuations

VanEck Morningstar US Wide Moat UCITS ETF seek to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

Main risk factors

Foreign Currency Risk: Because all or a portion of the Fund are being invested in securities denominated in foreign currencies, the Fund’s exposure to foreign currencies and changes in the value of foreign currencies versus the base currency may result in reduced returns for the Fund, and the value of certain foreign currencies may be subject to a high degree of fluctuation.

Equity Market Risk: The prices of the securities in the Fund are subject to the risks associated with investing in the securities market, including general economic conditions and sudden and unpredictable drops in value. An investment in the Fund may lose money.

Limited Diversification Risk: The Fund may invest a relatively high percentage of its assets in a smaller number of issuers or may invest a larger proportion of its assets in a single issuer. As a result, the gains and losses on a single investment may have a greater impact on the Fund's Net Asset Value and may make the Fund more volatile than more diversified funds.

Risk of investing in smaller companies: The securities of smaller companies may be more volatile and less liquid than the securities of large companies. Smaller companies, when compared with larger companies, may have a shorter history of operations, fewer financial resources, less competitive strength, may have a less diversified product line, may be more susceptible to market pressure and may have a smaller market for their securities.

For more information on risks, please see the “Risk Factors” section of the relevant Fund’s prospectus, available on www.vaneck.com. Always read the KID and the prospectus before investing in a fund.

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