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  • Moat Investing

    More of the Same (Good) Thing in Moat Investing

    Brandon Rakszawski, Senior ETF Product Manager
    December 09, 2019
     

    The Morningstar® Wide Moat Focus IndexSM (“Moat Index”) has fortunately provided plenty of positive news to write about throughout 2019, particularly in the second half of the year, with impressive stock selection being a major story this year. November offered more of the same. This month gave the financials sector its turn to shine, extending the Moat Index’s year-to-date outperformance vs. the S&P 500 Index to more than five percent through November.

    Outperformance Across the Board

    Trailing Return (%) as of 11/30/2019

      1 Mo YTD 1 Yr 3 Yr 5 Yr
    Moat Index 4.27 32.85 20.70 17.94 13.39
    S&P 500 Index 3.63 27.63 16.11 14.88 10.98
    Morningstar US Fund Large Blend Category Average 3.43 25.23 13.93 12.88 8.86

    Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com.

    Moat Stocks Mega Merger

    Charles Schwab Corp. (SCHW) was the Moat Index standout in November. The company’s stock price rallied 22% during the month on the heels of the announced acquisition of narrow moat TD Ameritrade (AMTD). The all-stock transaction was valued at an estimated $26 billion. Morningstar views Charles Schwab’s massive scale and industry-leading cost efficiency as wide moat worthy. Despite the company’s decision to cut commission pricing to $0 in early October, Morningstar believes the company can sustain returns on invested capital well above the cost of capital. A recent note from Morningstar cited a potential 10-15% upside to Charles Schwab’s fair value estimate based on the proposed deal terms.

    Financials, Financials, Financials

    Three other financials companies, all from different segments of the sector, were among the top performing Moat Index constituents in November. Custody bank State Street Corp. (STT) continued riding the momentum following the strong earnings results it reported in October to post gains in November. Asset manager BlackRock Inc. (BLK) saw a fair value estimate increase in mid-October in light of higher than expected assets under management figures. Lastly, Wells Fargo & Co. (WFC) posted solid performance in November, continuing the strong positive trend that began in mid-August.

    Most Sectors Contribute to Positive Returns for Moat Index

    1 Month as of 11/30/2019
    Most Sectors Contribute to Positive Returns for Moat Index

    Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com.

    Down in the HOG Pit

    41 of the Moat Index’s 51 constituents contributed positively in November. One standout on the downside was Harley Davidson Inc. (HOG), which has struggled in the face of nonexistent switching costs as consumers replace their bikes with cheaper alternatives. Morningstar notes HOG’s dominant position in the U.S. motorcycle market but also recognizes competitive pressures from lower cost providers and international competition in cyclical downturns or periods of exchange-rate differentials that allow foreign companies to discount their bikes domestically.

    Top Performing Moat Index Companies
    Name November Return (%)
    Charles Schwab Corp 22.07
    ServiceNow Inc 14.47
    State Street Corporation 13.67
    Altria Group Inc 10.96
    Amgen Inc 10.80

    Bottom Performing Moat Index Companies
    Name November Return (%)
    Harley-Davidson Inc -6.50
    KLA Corp -2.60
    Cheniere Energy Inc -1.64
    Comcast Corp Class A -1.49
    Blackbaud Inc -1.13

    Source: Morningstar. Past performance is no guarantee of future results. These are not recommendations to buy or to sell any security.

    Important Disclosures

    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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    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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    An investment in the VanEck Vectors Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in the health care, consumer discretionary, industrials, financial services sectors, medium-capitalization companies, equity securities, market, operational, 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-diversified, and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

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