Moat Investing Rises Above Magnificent Seven Dominance
October 09, 2023
Read Time 7 MIN
Once again, September lived up to its historical standing as the worst month of the year for markets, with U.S. equities seeing one of their biggest monthly pullbacks of 2023. Investors faced a long list of worries during the month, including a more hawkish than expected tone from Federal Reserve Chair Jerome Powell, soaring oil prices, narrow equity market leadership of mega-cap tech, and the United Auto Workers union strike. Then on the final trading day of the month, concerns about a government shutdown weighed on the market even further.
The Morningstar Wide Moat Focus Index (the “Moat Index”) was not resistant to market troubles, finishing down 5.44% in September, while the S&P 500 Index declined 4.77%. However, year-to-date the Moat Index continues to lead the S&P 500 by over 400 basis points. Smaller-cap companies also saw a modest decline during the month, yet the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) weathered the storm better than both the small- and mid-cap broad benchmark indexes.
Moat Indexes Maintain YTD Lead
Source: Morningstar. As of 9/30/2023. 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.
The Growing Magnificent Seven Concentration Problem
The expanding dominance of the "Magnificent Seven" mega-cap technology stocks has raised eyebrows in financial circles, leading to growing concerns about concentration risk in the U.S. equity market. These behemoths, which include Apple, Amazon, Microsoft, Google, Nvidia, Tesla, and Meta have seen their market values soar, making them pivotal players in the stock market's performance. Today, the Magnificent Seven make up over 25% of the S&P 500 Index and have contributed more than 70% of the index’s YTD returns1.
While their spectacular rise underscores the transformative power and profitability of technology in today's digital age, it also poses a potential risk. If any of these companies were to falter, the ripple effect on the broader market could be significant. Diversification is a cornerstone of risk management in investing, and the increasing reliance on a handful of stocks for market returns challenges this foundational principle.
The equal-weighted Moat and SMID Moat strategies offers investors a potential solution to this growing concentration risk. By allocating equal importance to each stock, these approaches inherently reduce the influence of mega-cap tech giants, promoting diversification and potentially offering a buffer against the volatility of a few dominant players. And investors shouldn’t take this to mean reduced return potential either, as the Moat Index has actually outperformed the S&P 500 so far this year—despite its structural underweight to the Magnificent Seven.
September Index Reconstitution
Both the Moat and SMID Moat Indexes underwent quarterly reviews on September 15, 2023. Each quarter they systematically target the most attractively priced U.S. moat companies within their respective universes. Below are a few takeaways from the September reviews and how the indexes are positioned heading into the remainder of the year. Full results of the most recent quarterly reviews are available here: Moat Index and SMID Moat Index.
Moat Index Highlights
Growth Exodus Led by Technology
The Moat Index saw its technology exposure increase to the largest overweight in quite some time at the end of 2022, following the drastic declines in valuations for the sector that year. Now, with the incredible rally that many of these companies experienced in the first half of the year, their valuations have become less attractive. During the September review, the Moat Index continued its shift away from growth stocks, which began in June 2023, to more of a blend/value posture.
The technology sector saw the largest reduction in exposure, signaling growth as an overvalued segment of the U.S. market. Tech stocks are now the largest underweight in the Moat Index, about 12% relative to the S&P 500 Index. This technology sector void was filled by companies from more value-oriented sectors such as industrials (Honeywell, RTX Corp.), financials (Charles Schwab, MarketAxess) and consumer staples (Estee Lauder, Campbell Soup).
| Index Style Exposure | Current Exposure | Rebalance Change | Relative to S&P 500 |
| Value | 29.0% | +4.1% | +7.3% |
| Core | 46.8% | +3.2% | +6.1% |
| Growth | 24.2% | -7.3% | -13.4% |
Source: Morningstar. As of 9/15/2023.Not intended as a recommendation to buy or sell any securities mentioned herein. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Moat Index’s Magnificent Seven Exposure
The market has taken a liking to the new moniker representing the seven companies driving the vast majority of U.S. market returns: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Amid stretched valuations this quarter, the Moat Index removed Meta Platforms leaving only Alphabet, Amazon, and Microsoft in the Moat Index at around a 5% weighting. Meanwhile, the Magnificent Seven have more than 25% exposure in the S&P 500 Index.
Valuations Remain Attractive
The weighted average price-to-fair value of the Moat Index fell from 0.81 to 0.77 following the September review, signaling a 23% discount to Morningstar’s fair value estimate. This is in contrast to the S&P 500 Index, which featured a weighted average price-to-fair value ratio of 0.96 as of the same date.
SMID Moat Index Highlights
Technology Companies Lead in Removals
This quarterly review the SMID Moat Index saw the removal of a number of technology companies. In all, seven technology names were removed, including Crane NXT, Blackbaud, Guidewire Software, Monolithic Power Systems, Verisign, and WorkDay. Nearly all of these removals were due to the Index’s valuation screen. However, Morningstar still sees some opportunity within the technology sector, as there were also a few new tech names added this quarter as well. These companies include the global IT services provider Cognizant Tech Solutions and Tyler Technologies, which provides a full suite of software solutions and services that address the needs of cities, schools, courts and other local government entities.
Value Exposure Decreased in Favor of Growth
Despite the SMID Moat Index’s removal of several technology companies, the style exposure within the Index still shifted slightly toward growth this quarter. The shift came primarily at the cost of value, which saw a reduction in exposure this quarter. This is in contrast to the larger-cap Moat Index, which saw the reserve shift in these exposures. Total growth exposure for the SMID Moat Index now stands at about 26%, but remains a minor underweight of about 3% relative to the broad SMID-cap universe.
| Index Style Exposure | Current Exposure | Rebalance Change | Relative to Broad SMID Index |
| Value | 29.0% | -4.4% | +2.5% |
| Core | 45.2% | +1.7% | +0.3% |
| Growth | 25.8% | +2.7% | -2.8% |
Source: Morningstar. As of 9/15/2023. Not intended as a recommendation to buy or sell any securities mentioned herein. Broad SMID Index refers to the Morningstar US Small-Mid Cap Index, is a broad-based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Consumer Discretionary and Health Care Additions
Companies belonging to the consumer discretionary and health care sectors were notable additions this quarter with 12 names between the two sectors added to the Index. DoorDash, Harley-Davidson and Wynn Resorts were among the consumer discretionary additions, while health care saw names added like Veeva Systems, DaVita, and Agilent Technologies. Both sectors are overweights in the SMID Moat Index relative to the broad SMID-cap universe.
SMID Moat Valuations Remain Attractive
The weighted average price-to-fair value of the SMID Moat Index fell from 0.77 to 0.75 following the September review, signaling a 25% discount to Morningstar’s fair value estimate. This is in contrast to the broad based Morningstar US Small-Mid Cap Index, which featured a weighted average price-to-fair value ratio of 0.96 as of the same date.
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Important Disclosures
* ”Magnificent Seven” refers to the group of seven mega-cap tech stocks in the S&P 500 that consists of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
1 Source: Morningstar Direct. As of 9/30/2023.
Source for all data unless otherwise noted: Morningstar.
© Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
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 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 or industries mentioned are 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.
Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: SMOT - VanEck Morningstar SMID Moat ETF - 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 https://www.spglobal.com/spdji/en/. 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
* ”Magnificent Seven” refers to the group of seven mega-cap tech stocks in the S&P 500 that consists of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
1 Source: Morningstar Direct. As of 9/30/2023.
Source for all data unless otherwise noted: Morningstar.
© Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
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 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 or industries mentioned are 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.
Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: SMOT - VanEck Morningstar SMID Moat ETF - 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 https://www.spglobal.com/spdji/en/. 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.