The first half of the year is officially complete, and this lopsided tech rally is possibly becoming one of the most hated bull markets in history. U.S. equities have refused to slow down despite debt ceiling angst, regional banking fears, continued tightening credit conditions, and a commercial real estate market teetering on the edge. In the face of these concerns, the Nasdaq registered its strongest first-half performance in 40 years with a gain of over 31%. Additionally, Apple, the world's most valuable company, closed above the $3 trillion market capitalization mark for the first time.
The Morningstar Wide Moat Focus Index (the “Moat Index”) has also recorded a strong first half—its strongest since its inception in 2007—gaining over 23% year-to-date as of the end of June. This performance puts it ahead of the S&P 500 Index by more than 600 basis points. While smaller-cap companies rebounded in June, they still remain behind large caps in terms of year-to-date performance. However, the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) ended June ahead of both the small- and mid-cap broad benchmark indexes for the month- and year-to-date periods.
Moat Indexes Lead Broad Equity Markets at the Half
Moat Indexes Lead Broad Equity Markets at the Half
Source: Morningstar. As of 6/30/2023. 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.
MOAT ETF Stands Out Among Peers Thanks to Quality Stock Selection
Over its 11+ year history, the VanEck Morningstar Wide Moat ETF (MOAT), which seeks to track the Moat Index, has delivered historical outperformance, versus both broad market indexes and actively managed strategies, through various market environments and across investing styles. According to Morningstar, MOAT ranks in the top 1% for 5- and 10-year periods and the top decile for 1- and 3-year periods among Large Blend funds*(please see Morningstar ratings disclosures below).The key to this success has been Morningstar’s robust equity research process and a disciplined approach that targets quality companies with attractive valuations through a forward-looking approach. Additionally, MOAT has provided access to this time-tested investment philosophy for a cost well below the typical fee charged by large blend fund managers.
Both the Moat and SMID Moat Indexes underwent quarterly reviews on June 16, 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 June reviews and how the indexes are positioned heading into the second half of the year. Full results of the most recent quarterly reviews are available here: Moat Index andSMID Moat Index.
Moat Index Highlights
So Long Tech, Until We Meet Again
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. Now, with the incredible rally that many of these companies experienced in the first half of the year, their valuations have become too lofty. Similar to the tech profit taking during the March review, the Moat Index continued that trend this quarter, locking in further gains in tech and shifting exposure to other areas of the market with more attractive valuations. The reduced exposure this review came by way of software companies and semiconductor companies. Technology exposure in the Moat Index moved from market weight to a notable underweight, about 7%, relative to the S&P 500 Index.
Hello Heath Care and Financials
Health care and financials were the primary beneficiaries from the above-mentioned valuation driven shift away from technology names. From the health care sector, the new additions are from the biotech, pharmaceutical, and life sciences sub-industries. These additions include Gilead Sciences (GILD), Pfizer (PFE) and Agilent Technologies (A), among others. On the financials side, names added to the index include Bank of America (BAC), Charles Schwab (SCHW), The Bank of New York Mellon (BK), and MarketAxess (MKTX). Health care and financial exposures now represent slight overweight’s relative to the S&P 500 Index.
Growth Exposure Pared by More than 10%
The Moat Index’s shift away from tech, to traditional value-oriented sectors like financials and health care, resulted in a notable reduction to growth exposure. Value and core companies equally picked up exposure within the index. Core stock exposure is the largest in the Index followed by growth and then value. Value is now slightly overweight relative to the S&P 500 Index, core is notably overweight and growth exposure is more than a 13% underweight.
Index Style Exposure
Current Exposure
Rebalance Change
Relative to S&P 500
Value
26.4%
+4.9%
+2.8%
Core
46.3%
+5.6%
+10.7%
Growth
27.3%
-10.5%
-13.5%
Source: Morningstar. As of 6/16/2023.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.
Valuations Remain Attractive
The weighted average price-to-fair value of the Moat Index fell from 0.85 to 0.81 following the June review, signaling a 19% 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 0.98 as of the same date.
SMID Moat Index Highlights
The Rise of the Consumer
This quarterly review the SMID Moat Index saw a notable increase to consumer discretionary names with the addition of nine companies from the sector. Many of these additions are beaten down retail names including Bath & Body Works (BBWI), Etsy Inc. (ETSY), Williams-Sonoma (WSM), Burlington Store (BURL) and Best Buy Co. (BBY). The remaining consumer discretionary names added were a mix of hotel, restaurant, and automobile companies like Domino’s Pizza (DPZ), Harley-Davidson (HOG), DoorDash (DASH) and Aptiv (APTV). Many of these names were among those with the lowest price-to-fair value entering the index this quarter, signaling potential deep valuation opportunities.
The consumer discretionary sector is now the largest overweight in the SMID Moat Index, about +10%, relative to the broad Morningstar US SMID Index (the “Broad SMID Index”). Other over weights include the communication services (+4%) and the industrials (+2.5%) sectors. On the other end of the spectrum, the real estate and utilities sectors account for the largest under weights with exposures both about 6% less relative to the Broad SMID Index.
Growth Exposure Increases, But Remains an Underweight
Contrary to the Moat index, which saw growth exposure pared back by more than 10% this quarter, the SMID Moat Index’s review led to a slight increase to growth exposure. Despite the increase, the SMID Moat Index still remains underweight growth compared to the broad SMID universe. It is worth noting that growth is much less dominant in the broader small-mid cap universe compared to the large cap space. Growth only makes up about 28% of Morningstar’s broad SMID index while making up about 40% of the S&P 500 Index.
Index Style Exposure
Current Exposure
Rebalance Change
Relative to Broad SMID Index
Growth
19.7%
+2.1%
-7.8%
Core
54.8%
+2.5%
+5.2%
Value
25.5%
-4.6%
+2.6%
Source: Morningstar. As of 6/16/2023.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.
SMID Moat Valuations Remain Attractive
The weighted average price-to-fair value of the SMID Moat Index fell from 0.78 to 0.76 following the June review, signaling a 24% discount to Morningstar’s fair value estimate. This is in contrast to the Morningstar US Small-Mid Cap Index, which featured a weighted average price-to-fair value ratio of 0.97 as of the same date.
Accessing Moat Stocks
VanEck 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.
VanEck Morningstar SMID Moat ETF (SMOT) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Small-Mid Cap Moat Focus Index.
