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Keepin’ it Contrarian: Moat Index Adds Health Care, Reduces Tech

December 24, 2024

Read Time 4 MIN

Thirteen companies rotated in and out of the Moat Index during its December quarterly rebalance.

The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) underwent its quarterly review on December 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 December review and how the Moat Index is positioned following a U.S. presidential election and shifting market sentiment. The full review results are available here:

Moat Index Review Takeaways:

  • Health Care Top Overweight, Tech Even Larger Underweight

    The Moat Index pared back some of its industrials exposure as a result of less attractive company valuations and increased its health care exposure by dialing up the weight of one existing constituent and adding four new health care companies to the Index. Health care is currently one of the most undervalued sectors in the U.S. equity market, according to Morningstar’s analysis. The Moat Index’s underweight to the tech sector became more pronounced. Strong performance from several software companies allowed the Moat Index to systematically lock in gains and remove or scale down these companies’ positions.

  • Style Trends: Blend is Top Exposure, Value Increased and is Largest Overweight, Growth Decreased

    The S&P 500 Index continued to reach all-time highs throughout the fourth quarter gaining significant momentum following the U.S. presidential election. As mega caps continue to dominate its makeup and its returns, the S&P 500’s growth style dominance remains on full display. Most importantly, the largest mega cap companies are becoming an increasingly larger part of investor portfolios. 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 and allows investors to meaningfully participate in the U.S. equity market with the added benefit of portfolio diversification. To illustrate the point, as of December 20th, the “Magnificent 7” accounted for over one third of the S&P 500’s weight while they only represented about 5.5% among three companies.

  • U.S. Equity Exposure Without the Lofty Valuations

    Further to the diversification point above, the price/fair value ratio of the S&P 500 Index currently sits at 1.07. This implies that the companies in the S&P 500 are, overall, trading at approximately a 7% premium to fair value, according to Morningstar. This presents a challenge for investors grappling with these lofty valuations and portfolio concentration. 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 that differ substantially from existing core portfolio positions. Currently, the Morningstar price/fair value ratio of the Moat Index is 0.83, implying a 17% discount to fair value.

  • New Names

    There were two companies that were added to the Moat Index for the first time in its over 17-year history:

    West Pharmaceutical Services (WST): West Pharmaceutical has long traded at a premium to its fair value estimate and just recently became attractively priced enough to warrant inclusion in the Moat Index. West is a major player in the injectable pharmaceutical packaging market. West Pharmaceutical is required to coordinate closely with and develop trust from pharmaceutical customers to ensure stability, purity, and sterility of drugs to meet regulatory standards. West has a large market share in elastomer components for injectable drugs and benefits from the high switching cost associate with its customers disrupting their existing supply chain.

    Danaher Corporation (DHR): Danaher is a unique Moat Index entrant in that it was just upgraded from a narrow moat rating to wide moat rating in November 2024. Its upgrade reflects the long durability of its customer switching costs, according to Morningstar, in addition to their strong intangible assets. This upgrade to its moat rating also boosted the length of time Morningstar expects Danaher to remain profitable, ultimately pushing their fair value estimate higher. This illustrates Morningstar’s integrated research process by which moat ratings influence valuations. Danaher manufactures scientific instruments and consumables in the biotech, life sciences, and diagnostics industries.

4Q 2024 Moat Index Review Results

Moat Index Sector Shifts Following 4Q 2024 Review

Moat Index Sector Exposure Relative to S&P 500 Index

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

Source: Morningstar. As of 12/20/2024 unless otherwise noted.

Access Quality Companies and Attractive Valuations

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

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Important Disclosures

Source for all data unless otherwise noted: Morningstar.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: MOAT - VanEck Morningstar Wide Moat ETF - Holdings.

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. Past performance is no guarantee of future results.

An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or VanEck Morningstar Wide Moat Fund and bears no liability with respect to the funds or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.

The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.

An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, risks related to investing in equity securities, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.

You can lose money by investing in the VanEck Morningstar Wide Moat Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. The Fund is subject to risks which may include, but are not limited to, risks related to competitive advantage assessment, equity securities, financials sector, health care sector, high portfolio turnover, index tracking, industrials sector, industry concentration, information technology sector, market, medium-capitalization companies, non-diversification, operational, passive management, and underlying fund investments risk, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Important Disclosures

Source for all data unless otherwise noted: Morningstar.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: MOAT - VanEck Morningstar Wide Moat ETF - Holdings.

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. Past performance is no guarantee of future results.

An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or VanEck Morningstar Wide Moat Fund and bears no liability with respect to the funds or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.

The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.

An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, risks related to investing in equity securities, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.

You can lose money by investing in the VanEck Morningstar Wide Moat Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. The Fund is subject to risks which may include, but are not limited to, risks related to competitive advantage assessment, equity securities, financials sector, health care sector, high portfolio turnover, index tracking, industrials sector, industry concentration, information technology sector, market, medium-capitalization companies, non-diversification, operational, passive management, and underlying fund investments risk, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.