Tariffs Pressure Mega-Caps: Moat Stocks Show Resilience

In February, U.S. equity markets navigated a turbulent month, marked by a noticeable shift in investor risk appetite that gained momentum starting around mid-month. The catalyst was the steep U.S. tariffs on Mexico, Canada and China, prompting concerns of a trade war and retaliatory measures from all three nations. This escalating trade tension rattled markets, amplifying uncertainty and triggering a pullback, particularly in mega-cap tech stocks, which had been the linchpin of market returns for more than a year.

Tech giants like Nvidia faltered under the pressure, as investors grew wary of their outsized exposure amid uncertain geo-politics and the resulting economic impact. The broader market struggled to regain footing, reflecting a growing preference for caution over risk. This shift underscored the fragility of a market heavily concentrated in a handful of mega-cap tech names, hinting that diversification might be a prudent consideration as the year unfolds.

The Morningstar Wide Moat Focus Index (the “Moat Index”) retreated along with the broad U.S. equity market in February, declining 3.8%, for the month. While its equal-weighted methodology and sector positioning was a relative strength compared to the S&P 500, earnings-driven volatility offset these advantages and ultimately resulted in a tough close on the month. Notably though, the Moat Index’s differentiated exposure led to resilience during the volatile second half of the month and beginning of March, which saw abrupt broad market declines, particularly in mega-caps.

Moat Stocks Show Mettle Versus Mega-Caps in Tariff Volatility

Source: Morningstar; S&P Global. Time period: February 17th – March 4th. The S&P 500 Top 10 Index consists of 10 of the largest companies from the S&P 500. Index constituents are weighted by float-adjusted market capitalization. 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.

Tariff concerns also weighed on smaller-cap stocks, contributing to a sharp decline in the segment amid February’s volatility. Broad small- and mid-cap benchmarks fell 5.7% and 4.4%, respectively, during the month. However, the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) fared better, declining only 2.6%, as its emphasis on companies with durable economic moats provided a degree of stability. Despite the broader market downturn, the SMID Moat Index remained positive through the first two months of the year, while its comparative benchmarks slipped into negative territory.

Market Volatility Shakes Up Smaller Stocks

Source: Morningstar. Data as of 2/28/2025. 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 or by calling 800.826.2333.

Moat Index Highlights: Therapeutics Thrive

Sector positioning within the Moat Index was a positive driver of relative performance versus the S&P 500 in February. Overweights in health care and consumer defensive, as well as underweight exposure to consumer cyclicals proved beneficial amid the market shift. However, earnings-related volatility offset the positive sector positioning, resulting in underperformance during the month.

Not all earnings news was bad though, as wide-moat rated Gilead Sciences (GILD) surprised to the upside and was the top contributor to performance during the month. Gilead develops and markets therapies for life-threatening infectious diseases, primarily focusing on HIV and hepatitis B and C, but has also grown its presence in the oncology market as well. Gilead announced strong top- and bottom-line quarterly performance beating expectations and gave forward guidance that was ahead of estimates. Following the release Morningstar increased its fair value estimate citing solid underlying demand growth and margin strength. Shares of Gilead soared on the earnings beat, finishing the month up over 17%.

Also announcing strong earnings during the month was Kenvue (KVUE). Formerly a part of Johnson & Johnson, Kenvue spun off and went public in May 2023. It operates in a variety of silos within consumer health, such as cough, cold and allergy care, pain management, face and body care, and oral care, as well as women’s health. Its portfolio has some of the most well-known brands in the space, including Tylenol, Listerine, Johnson’s, Aveeno, and Neutrogena. Following the earnings beat, shares of KVUE surged and ended February up nearly 12%.

Other top contributors include semiconductor company Microchip Technology (MCHP), leading cigarette and smokeless tobacco brand parent firm Altria (MO), and top grocery and snack confectioner Mondelez International (MDLZ).

Top detractors in February include medical device company Bio-Rad Laboratories (BIO), well-known technology giant Alphabet (GOOGL), medical instruments supplier West Pharmaceutical Services (WST), life science and diagnostic firm Agilent Technologies (A), and global beauty products company Estee Lauder (EL).

Top Contributors and Detractors from Moat Index - February 2025

Contributors

Detractors

Source: Morningstar, February 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: Fashion and Travel in Trend

The SMID Moat Index's outperformance relative to small- and mid-cap broad benchmarks in February was primarily driven by strong stock selection, rather than sector overweights or underweights, which had little overall impact during the month.

The luxury fashion and accessory brands parent, Tapestry Inc. (TPR), topped the list of leading contributors after the company delivered strong quarterly earnings with sales and profitability surpassing expectations. Tapestry’s top brand, Coach, posted double-digit percentage sales growth in North America and outperformed the industry in Europe and China, as well. Management also announced increased outlook for 2025, sending shares of TPR up 17% during the month following the news.

Another name helping drive performance this month, also off the back of a positive earnings release, was the travel services company, Expedia Group (EXPE). Expedia shares rose 15% in February, as investors cheered fourth-quarter bookings growth acceleration and strong EBITDA margin expansion. Morningstar raised its fair value estimate from $191 to $210 to reflect revenue and profitability strength in the quarter and higher future gross margins expectations.

Names that detracted most from performance during the month include luxury cruise liner operators Norwegian Cruise Line (NCLH) and Carnival Corp. (CCL), merchant payment service provider Block Inc. (XYZ), global crop protection materials company FMC Crop. (FMC), as well as video and chat communications company Zoom (ZM).

Top Contributors and Detractors from SMID Moat Index - February 2025

Contributors

Detractors

Source: Morningstar, February 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 US moat companies:

VanEck Morningstar Wide ETF (MOAT): 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.

Source for all data unless otherwise noted: Morningstar.

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.