ETF Trends
Charting the Moat Index’s Long-Term Track Record
VanEck
14 min read

This article was originally published on ETFTrends.com.

By Brandon Rakszawski, Director of Product Management

The strength of Morningstar’s moat indexes lies in its forward-looking approach to selecting quality companies, as shown by its history of outperforming the S&P 500 over long holding periods.

August was a volatile month for U.S. equity markets. The S&P 500 Index finished the month in negative territory for the first time since February 2023. Several market forces impacted companies during the month. Fitch downgraded the U.S. government’s long-term credit rating from AAA to AA+; the U.S. Department of Labor released data reinforcing the perception of a robust labor market, which could potentially allow the Fed to more easily prolong their tightening policy; and corporate earnings continue to come in lower than prior quarters, although not quite as low as predicted. These and other factors led to increased uncertainty in the equity markets in August.

The Morningstar Wide Moat Focus Index (the “Moat Index”) trailed the S&P 500 by 2% in August (-3.59% vs. -1.59%, respectively). This sizable underperformance month is generally uncharacteristic, as the Moat Index has only trailed the S&P 500 by more than 2% in five of the last 60 months. As is typically the case, the underperformance was driven by stock selection rather than sector overweights or underweights. Despite the difficult month, the Moat Index remains more than 500 basis points ahead of the S&P 500 for the year with a 23.90% return through August versus the S&P 500’s return of 18.73%.

Looking to smaller-cap companies, the market returns were more negative in August for smaller companies. Mid cap stocks, as represented by the S&P MidCap 400 Index (-2.89%) and the S&P SmallCap 600 Index (-4.14%) both finished increasingly more in the red. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”), like the Moat Index, struggled relatively in August with a return of -4.16%. Because there is some overlap in the two moat indexes, many of the same companies were key contributors to negative performance.

More to the Moat Story than One Month

No investors want to see their strategy underperform a broad market benchmark. But, despite all of the success the Moat Index has had over its more than 15-year history, it has only outperformed the S&P 500 in any given calendar month 50% of the time. Stated differently, the Moat Index has outperformed the S&P 500 by 3.25% annually since its February 14, 2007 launch but has underperformed the S&P 500 Index in nearly half of the months along the way.

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