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

September 23, 2024

Read Time 4 MIN

Fourteen companies rotated in and out of the Moat Index during its quarterly rebalance, but exposures remain cut from the same cloth: similar sector biases, a value bias, and the same relentless focus on attractive valuations.

The Morningstar® Wide Moat Focus IndexSM (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:

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

Moat Index Sector Shifts Following 2Q 2024 Review

Sector Exposure Relative to S&P 500 Index

Moat Index Sector Exposure Relative to S&P 500 Index

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

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

Source: Morningstar. As of 9/20/2024 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.