Access SMID Cap Stocks with Confidence

Small– and mid–cap (SMID) stocks are an attractive segment of the U.S. equity market, having historically provided greater return potential than large–caps. However, investors should be mindful when making an allocation due to the large universe of SMID–cap stocks and the lack of available research on these smaller and lesser–known companies relative to large–caps.

Within this universe, a strategy that selectively identifies stocks may be more prudent than a broad–based market approach. Leveraging Morningstar’s rigorous equity research, the VanEck Morningstar SMID Moat ETF (SMOT) provides thoughtful exposure to SMID–cap stocks, targeting companies with long–term competitive advantages, known as moats, and attractive valuations.

Powered by Morningstar’s Equity Research

There are about five times as many SMID–cap stocks as there are large–cap stocks. However, the average SMID–cap stock has fewer than eight analysts covering it, compared to roughly 21 analysts for the average large–cap stock.

The Morningstar^® US Small–Mid Cap Moat Focus Index^SM (the “Index”) targets small– and mid–cap moat companies with attractive valuations and is powered by Morningstar’s equity research. Morningstar’s team of more than 100 analysts covers over 1,500 companies globally. More than 200 asset managers and 75,000 financial advisors rely on Morningstar’s research. All of Morningstar’s equity analysts follow a single, consistent research methodology to identify companies with long–term competitive advantages and assign a fair value estimate based on future cash flows. SMOT provides access to this rigorous and forward–looking equity research by seeking to track the Morningstar US Small–Mid Cap Moat Focus Index.

Morningstar’s Robust Equity Research Team and Resilient Process

Source: Morningstar. See disclaimers and descriptions at bottom of page.

Economic Moats: Competitive Advantages Built to Last

An economic moat is a durable competitive advantage that allows a firm to keep competitors at bay and generate economic profits over an extended period. To help investors identify companies that possess an economic moat, Morningstar’s equity research team assigns one of three economic moat ratings: wide, narrow, or none. There are two major criteria that must be satisfied for a company to earn a moat rating of narrow or wide.

First, the company must be likely to generate returns on invested capital above its weighted average cost of capital for at least the next 10 years in the case of narrow moats, and at least 20 years for wide moats. Second, it must possess one of the five economic moat sources that Morningstar has identified: switching costs, intangible assets, network effect, cost advantage and efficient scale. Each source of moat is a driver of structural competitive advantage that can help a company protect its profitability well into the future.

The Morningstar US Small–Mid Cap Moat Focus Index exclusively targets these narrow and wide moat SMID–cap companies, giving investors confidence that only companies with sustainable competitive advantages are selected for inclusion.

The Five Sources of Moats

Source: Morningstar. See disclaimers and descriptions at bottom of page.

A Focus on Valuations

Equally important to identifying companies with economic moats is ensuring you do not overpay for them. Beyond identifying economic moats, Morningstar’s analysts also create fair value estimates for companies based on a three–staged discounted cash flow model that incorporates their in–depth knowledge and expectations for future growth. This forward–looking valuation assessment reflects long–term cash flow forecasts, which many traditional valuation metrics, like price/earnings, may not be as well–equipped to capture.

Over time, a company’s stock may trade above or below Morningstar’s fair value estimate, which may create potential opportunities to invest in a company at a discount to fair value. This fair value estimate is one of the primary inputs driving stock selection within Morningstar’s Index. The Index targets those small– and mid–cap moat companies that are trading at the greatest discount to Morningstar’s estimated fair value, while avoiding those that are potentially overvalued.

Access SMID–Cap Moat Stocks with Confidence

The VanEck Morningstar SMID Moat ETF (SMOT) aims to make sense of the large and less researched small– and mid–cap space by offering investors a focused and selective strategy powered by Morningstar’s robust equity research. SMOT seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Small–Mid Cap Moat Focus Index.

To learn more about the VanEck Morningstar SMID Moat ETF, visit the SMOT product page.

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