Regional Bank U.S. Bancorp Tops Moat Stocks in July
August 08, 2023
Read Time 5 MIN
U.S. equity markets continued their rally in July with the S&P 500 and Nasdaq logging a fifth month in the green, the longest winning streak for either since 2021. Positive market sentiment was attributed to moderating inflation and resilient economic data, raising hopes for a soft landing. The July market gains came despite another quarter of a percentage point rate hike by the U.S. Federal Reserve late in the month.
The Morningstar Wide Moat Focus Index (the “Moat Index”) gained 4.38% in July, outpacing the benchmark S&P 500 Index by over 100 basis points during the month and extending its year-to-date lead to nearly 800 basis points. The rebound in smaller-cap companies that began last month continued in July, with both small- and mid-caps outpacing their large-cap peers. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) returned 4.32% in July, ahead of mid-caps but trailing pure small-caps during the month. However, year-to-date the SMID Moat Index leads both small- and mid-cap broad benchmarks by roughly 300 and 200 basis points, respectively.
Moat Indexes Maintain Lead Over Broad Equity Markets
Source: Morningstar. As of 7/31/2023. 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.
Uncovering Quality Opportunity Amid Turmoil: U.S. Bancorp
U.S. Bancorp (USB), one of the nation's largest regional banks with branches in roughly 26 states, was the top contributor to performance in July for the Moat Index with shares of USB up over 20% during the month. The recent positive performance for USB comes after months of negative sentiment in the banking sector following the turmoil that saw the collapse of several U.S. regional banks, including Silicon Valley Bank, back in March of this year. Morningstar analyst Eric Compton, who covers the banking sector, believed much of the selloff in banks at that time was overdone and that valuation opportunities existed. Eric’s conviction helped contribute to U.S. Bancorp’s inclusion in the Moat Index, and Eric’s latest comments indicate that there may still be opportunity left to capture.
Morningstar Analyst Comments | by Eric Compton July 19, 2023
Wide-moat-rated U.S. Bancorp reported what we consider to be another average quarter. However, we believe the shares have been materially undervalued, and when they are as cheap as they have been, sometimes it only takes an average quarter to encourage some rerating by the market. We think the market is most excited about management’s increased specificity and guidance with regard to the capital build process. As we incorporate the latest results and slightly lower our net interest income forecast, we do not expect a material change to our $53 fair value estimate. We continue to view the shares as materially undervalued.
Other top contributors in July include the restaurant operator and franchiser Domino’s Pizza Inc. (DPZ) and e-commerce marketplace operator Etsy Inc (ETSY). On the opposite side, detractors to Moat Index July performance included credit bureau Equifax (EFX) and medical device company Zimmer Biomet (ZBH).
Top Contributors and Detractors from Moat Index - July 2023
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| U.S. Bancorp | USB | Financials | 2.28 | 0.46 |
| Domino's Pizza Inc | DPZ | Consumer Cyclical | 2.56 | 0.45 |
| Etsy Inc | ETSY | Consumer Cyclical | 2.08 | 0.42 |
| Polaris Inc | PII | Consumer Cyclical | 2.47 | 0.31 |
| Alphabet Inc | GOOGL | Communication Services | 2.53 | 0.27 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Equifax Inc | EFX | Industrials | 2.56 | -0.34 |
| Zimmer Biomet Holdings Inc | ZBH | Healthcare | 2.58 | -0.13 |
| Tyler Technologies Inc | TYL | Technology | 2.72 | -0.13 |
| Biogen Inc | BIIB | Healthcare | 2.30 | -0.11 |
| The Estee Lauder Companies Inc | EL | Consumer Defensive | 1.31 | -0.10 |
Source: Morningstar, July 2023. 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.
Are the Tides Turning for Small Caps?
Small- and mid-cap companies have been in a rout for much of the year, underperforming relative to large- and mega-cap companies. The sour sentiment around small-caps has been due to the threat of a recession, which typically has a greater negative impact on the performance of smaller companies. Recently, small- and mid-caps have begun to bounce back, outperforming large-caps for the second month in row. Given that valuations for these smaller sized companies remain below historical averages, and the hopes for a soft landing are on the rise, we believe SMID-caps could be poised for a comeback.
Within the SMID Moat Index, market breadth of the July top contributors was wide, with each of the top five contributors representing a different sector. Global record label Warner Music Group (WMG) and Boston Beer Co. (SAM), a top player in high-end malt beverages, were each up just over 20% in July, representing the two largest contributors to performance for the month. Companies detracting the most from the SMID Moat Index performance during the month were industrial names Equifax (EFX) and Stericycle (SRCL) as well as payment network provider Discover Financial (DFS).
Top Contributors and Detractors from SMID Moat Index - July 2023
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Warner Music Group | WMG | Communication Services | 1.21 | 0.25 |
| Boston Beer Co Inc | SAM | Consumer Defensive | 1.22 | 0.25 |
| Tradeweb Markets Inc | TW | Financial Services | 1.20 | 0.23 |
| Etsy Inc | ETSY | Consumer Cyclical | 1.14 | 0.23 |
| Paycom Software Inc | PAYC | Technology | 1.42 | 0.21 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Equifax Inc | EFX | Industrials | 1.41 | -0.19 |
| Discover Financial Services | DFS | Financial Services | 1.45 | -0.14 |
| Stericycle Inc | SRCL | Industrials | 1.35 | -0.11 |
| Asbury Automotive Group Inc | ABG | Consumer Cyclical | 1.40 | -0.09 |
| Livent Corp | LTHM | Basic Materials | 0.83 | -0.09 |
Source: Morningstar, July 2023. 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.
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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.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. 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. 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 employees.
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/.
Holdings will vary for the SMOT 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-smid-moat-etf-smot/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.
The Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc.
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.
The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
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.
The Morningstar® US Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap IndexSM is a broad based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar.
The S&P SmallCap 600 Index represents small-cap US companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized US companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
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 © 2023 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.
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, consumer discretionary sector, 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.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and 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 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.
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Important Disclosures
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.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. 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. 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 employees.
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/.
Holdings will vary for the SMOT 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-smid-moat-etf-smot/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.
The Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc.
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.
The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
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.
The Morningstar® US Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap IndexSM is a broad based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar.
The S&P SmallCap 600 Index represents small-cap US companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized US companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
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 © 2023 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.
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, consumer discretionary sector, 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.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and 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 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.