The Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") ended the year with a loss of -0.74% versus -4.38% for the broad U.S. equity market as represented by the S&P 500® Index.
Strong performance for the year was driven in large part by the Index’s overweight to healthcare stocks, such as Eli Lilly and Co (LLY), Merck & Co., Inc. (MRK), and Express Scripts Holding Co. (ESRX). The communication services sector also saw success in 2018, driven largely by Twenty-First Century Fox Inc. (FOXA), which was also among the index’s top performers.
Not all positions benefited the U.S. Moat Index in 2018. L Brands, Inc. (LB) and General Electric (GE) were the most high profile performance detractors for the year as both saw their Economic Moat Ratings downgraded from wide to narrow by Morningstar’s equity analysts. But, in the aggregate, the index impressed in 2018.
New Year, New Positioning
The U.S. Moat Index is reviewed quarterly to ensure the Index is allocated to companies that Morningstar believes possess a sustainable competitive advantage and, just as importantly, are among the most attractively priced of those companies. Following the market sell-off in the fourth quarter, the U.S. Moat Index’s December review resulted in its most dramatic sector allocation shifts of the year.
U.S. Moat Index December Repositioning
Source: Morningstar. Index positioning not representative of fund positioning.
The Index pared its exposure to healthcare and consumer staples companies while adding to its information technology, financials, and industrials exposure.
Healthcare was the top sector contributor to returns of the U.S. Moat Index for the year and saw its weighting adjusted in December accordingly as several companies no longer represented a valuation opportunity. Interestingly, communications services and consumer discretionary companies were the second and third best contributors, respectively, in 2018 but both maintained similar exposure in the Index.
The most notable shift in the portfolio was the increase in information technology exposure. The U.S. Moat Index weighting of roughly 20% to information technology is now back to market weight relative to the S&P 500. Information technology was a significant underweight for most of 2018.
Clearly, valuation opportunities among wide moat companies changed as the year came to an end. The strategy locked in gains in several positions, exited some laggards, and allocated to several new companies with potential upside in the eyes of Morningstar equity analysts.
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 , Morningstar® Global ex-US Moat Focus IndexSM, and Morningstar® Global Wide Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Wide Moat ETF, VanEck Vectors Morningstar International Moat ETF, or VanEck Vectors Morningstar Global Wide 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 Index, Morningstar Global ex-US Moat Focus Index, and Morningstar® Global Wide Moat Focus IndexSM are service marks 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.
An investment in the VanEck Vectors Morningstar Wide Moat ETF (MOAT®), VanEck Vectors Morningstar International Moat ETF (MOTI®), VanEck Vectors Morningstar Global Wide Moat ETF (GOAT™) and VanEck Morningstar Wide Moat Fund, (the “Funds”) may be subject to risks which include, among others, investing in the health care, consumer discretionary, consumer staples, industrials, telecommunications, information technology, financial services, medium-capitalization companies, equity securities, market, operational, high portfolio turnover, index tracking and data, emerging market issuers, special risk considerations of investing in European and Asian issuers, depositary receipts, cash transactions, underlying fund, new fund, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, replication management, 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. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns.
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