Moat Index Delivers Strong Q1 Off Value Moves
April 06, 2021
Read Time 4 MIN
The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) completed its quarterly review on March 22, 2021. This review was awfully different than its review one year ago, when the Index was rebalancing into the market lows of the pandemic sell-off. As you may recall, the Index added several companies trading at an all-time low discount to their Morningstar-assigned fair value estimate. Companies like Boeing, Bank of America, and US Bancorp were added to the Moat Index for either the first time, or first time in quite a while.
Those moves, in March 2020, began the Index’s repositioning away from growth-oriented firms to more traditional value companies. The trend in March continued through the summer and into the Fall, as the Index maintained a significant overweight to financials and an equally significant underweight to the tech sector, which drove underperformance of the S&P 500® Index in 2020.
While 2020 ended on a sour note with the Moat Index underperforming the S&P 500 Index for the first calendar year since 2015, in retrospect its methodical, rules-based re-positioning set the Index up for success. Investors have shifted focus to cyclical stocks and have favored value stocks, over growth stocks at a rate we have not seen for some time. Through March 26, 2021, the Moat Index has outpaced the S&P 500 Index and both the Russell 1000 Growth Index and Russell 1000 Value Index.
As Tides Have Turned, Moat Index has Rode the Wave
YTD Total Return (%) as of 3/26/2021
Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com.
Much of that success has been driven by companies added to the Index throughout 2020 and several have now been removed or had their position scaled down in order to lock in gains and allow the Index to target other valuation opportunities. Despite these changes, the Index remains tilted toward value stocks moving into the second quarter.
Financials See Major Withdrawals
One big takeaway from this quarter’s Index review was the decline in Financials representation in the Index. The sector was the top overweight relative to the S&P 500 Index for much of 2020, but many of the Index financials companies saw their share price increase closer to or, above fair value, about 7% of the sector’s weight was cut from the Index and financials are now near market weight.
American Express (AXP) was removed from the Index completely and as a result, Bank of America (BAC), Charles Schwab (SCHW) and US Bancorp (USB) saw their weighting in the Index cut in half. All four were trading above their Morningstar fair value estimate as of March 26, 2021.
Tech Pivot: Hardware to Software (and Facebook!)
Tech stocks have been underweight in the Moat Index for many quarters and following the March review, it remains so. Several tech stocks were removed this month, primarily from the strong performing semiconductor industry, but the sector weighting remains approximately the same due to several additions. Alphabet (GOOGL), ServiceNow, Inc. (NOW), Tyler Technologies (TYL), and Adobe (ADBE) were all added to the Index in March.
Facebook (FB), a tech company classified in the communication services sector, was also added to the Moat Index in March. It has a notable past as it relates to coming in and out of the Index over the years. It was last removed from the Index in September 2020 and has left its mark each time it has been included.
The social networking company began trading at a discount to Morningstar’s fair value estimate shortly after being removed from the Index in September 2020, owing mostly to Morningstar’s increase in fair value estimate from $265 to $306 per share. Morningstar raised Facebook’s fair value estimate once in late January to $335 making its stock price too attractive relative to fair value for the Index to pass up this past review.
Final Results: Nine In, Nine Out
All told, the Moat Index had nine stocks removed from its sub-portfolio under review and nine added. All adds and cuts were driven by the Index’s price/fair value screen. No economic moat rating changes impacted the Index this quarter.
| Index Additions & Increased Allocations | ||
| Company | Ticker | Price/Fair Value |
| Alphabet Inc A | GOOGL | 0.78 |
| Facebook Inc A | FB | 0.79 |
| Cerner Corp | CERN | 0.82 |
| ServiceNow, Inc. | NOW | 0.85 |
| Tyler Technologies Inc | TYL | 0.85 |
| Roper Technologies Inc | ROP | 0.86 |
| Adobe Inc | ADBE | 0.88 |
| Northrop Grumman Corp | NOC | 0.90 |
| Dominion Energy Inc | D | 0.90 |
| Index Deletions & Decreased Allocations | ||||
| Failed Screen | ||||
| Company | Ticker | Moat Rating | Price/Fair Value | Other |
| US Bancorp | USB | x | ||
| Microchip Tech | MCHP | x | ||
| Lam Research Corp | LRCX | x | ||
| Applied Materials Inc | AMAT | x | ||
| Polaris Inc | PII | x | ||
| Bank of America Corp | BAC | x | ||
| John Wiley & Sons Inc. A | JW.A | x | ||
| Charles Schwab Corp | SCHW | x | ||
| American Express Co | AXP | x | ||
Source: Morningstar. Price/fair value data as of March 9, 2021. Past performance is no guarantee of future results. For illustrative purposes only.
View full Index review results here.
VanEck Vectors Morningstar Wide ETF (MOAT) seeks 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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The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. 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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/us/en/investments/morningstar-wide-moat-etf-moat/holdings.
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.
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.
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 Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF 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 consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
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.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected and historical growth rates.
The Russell 1000 Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
An investment in the VanEck Vectors Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in equity securities, consumer discretionary, consumer staples, financials, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, 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 concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs carefully before investing.
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Important Disclosures
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. 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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/us/en/investments/morningstar-wide-moat-etf-moat/holdings.
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.
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.
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 Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF 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 consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
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.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected and historical growth rates.
The Russell 1000 Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
An investment in the VanEck Vectors Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in equity securities, consumer discretionary, consumer staples, financials, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, 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 concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs carefully before investing.