The Morningstar® Wide Moat Focus IndexSM (“Moat Index”) is ahead of the S&P 500 Index by more than two percent for the current month through September 20, 2019 (4.52% vs. 2.36%, respectively). This follows a difficult August in which the Moat Index trailed the S&P 500® Index by nearly one percent on a total return basis (-2.30% vs. -1.58%, respectively).
Much of August’s struggles were driven by the financials sector. In particular, brokerage firm Charles Schwab Corp. (SCHW) and custody bank State Street Corp. (STT) were among the Moat Index’s five worst performing stocks for the month. One of its few energy sector holdings, Core Laboratories (CLB), had a particularly poor August despite featuring one of the largest economic moats in Morningstar’s oil field services coverage universe. CLB’s stock price has since reversed course and has helped elevate the Moat Index, leading all constituents from a total return perspective in September thus far.
This surge led into the index’s standard quarterly review. During the review, the eligible universe of U.S. stocks is assessed to allow for the Moat Index to represent wide moat companies with attractive valuations. Companies that have appreciated to near or above fair value may be replaced with companies that are more attractively priced. Alternatively, companies that have not realized their fair value may remain in the Moat Index or see their weighting increased to allow the market more time to realize the potential mispricing inherent in those companies’ prices.
Moat Index’s New Fall Look
Following the quarterly review, the Moat Index did not change its sector exposure significantly. Its health care weighting increased slightly, remaining the largest overweight relative to the S&P 500 Index, while information technology companies remain slightly underweight. However, there was a good deal of activity this quarter. Four companies that were partially removed from the Moat Index in June 2019 following a previous downgrade to their economic moat rating were fully removed this quarter. One additional constituent, General Mills (GIS) was removed from the Moat Index after the Morningstar equity research team downgraded its economic moat from wide to narrow in July, citing secular headwinds related to evolving consumer nutritional preferences.
Nine companies were removed because they were trading too close to fair value relative to other eligible wide moat companies. Several companies were added that are either new to the Moat Index or have not been seen in the index in quite some time, such as Domino Pizza Inc. (DPZ) and Altria Group Inc. (MO).
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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/etf/equity/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.
S&P 500® Index: consists of 500 widely held common stocks covering the leading industries of the U.S. economy.
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.
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