Regional Bank U.S. Bancorp Tops Moat Stocks in July

U.S. equity markets continued their rally in July with the S&P 500 and Nasdaq logging a fifth month in the green, the longest winning streak for either since 2021. Positive market sentiment was attributed to moderating inflation and resilient economic data, raising hopes for a soft landing. The July market gains came despite another quarter of a percentage point rate hike by the U.S. Federal Reserve late in the month.

The Morningstar Wide Moat Focus Index (the “Moat Index”) gained 4.38% in July, outpacing the benchmark S&P 500 Index by over 100 basis points during the month and extending its year-to-date lead to nearly 800 basis points. The rebound in smaller-cap companies that began last month continued in July, with both small- and mid-caps outpacing their large-cap peers. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) returned 4.32% in July, ahead of mid-caps but trailing pure small-caps during the month. However, year-to-date the SMID Moat Index leads both small- and mid-cap broad benchmarks by roughly 300 and 200 basis points, respectively.

Moat Indexes Maintain Lead Over Broad Equity Markets

Source: Morningstar. As of 7/31/2023. 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.

Uncovering Quality Opportunity Amid Turmoil: U.S. Bancorp

U.S. Bancorp (USB), one of the nation's largest regional banks with branches in roughly 26 states, was the top contributor to performance in July for the Moat Index with shares of USB up over 20% during the month. The recent positive performance for USB comes after months of negative sentiment in the banking sector following the turmoil that saw the collapse of several U.S. regional banks, including Silicon Valley Bank, back in March of this year. Morningstar analyst Eric Compton, who covers the banking sector, believed much of the selloff in banks at that time was overdone and that valuation opportunities existed. Eric’s conviction helped contribute to U.S. Bancorp’s inclusion in the Moat Index, and Eric’s latest comments indicate that there may still be opportunity left to capture.

Other top contributors in July include the restaurant operator and franchiser Domino’s Pizza Inc. (DPZ) and e-commerce marketplace operator Etsy Inc (ETSY). On the opposite side, detractors to Moat Index July performance included credit bureau Equifax (EFX) and medical device company Zimmer Biomet (ZBH).

Top Contributors and Detractors from Moat Index - July 2023

Source: Morningstar, July 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

Are the Tides Turning for Small Caps?

Small- and mid-cap companies have been in a rout for much of the year, underperforming relative to large- and mega-cap companies. The sour sentiment around small-caps has been due to the threat of a recession, which typically has a greater negative impact on the performance of smaller companies. Recently, small- and mid-caps have begun to bounce back, outperforming large-caps for the second month in row. Given that valuations for these smaller sized companies remain below historical averages, and the hopes for a soft landing are on the rise, we believe SMID-caps could be poised for a comeback.

Within the SMID Moat Index, market breadth of the July top contributors was wide, with each of the top five contributors representing a different sector. Global record label Warner Music Group (WMG) and Boston Beer Co. (SAM), a top player in high-end malt beverages, were each up just over 20% in July, representing the two largest contributors to performance for the month. Companies detracting the most from the SMID Moat Index performance during the month were industrial names Equifax (EFX) and Stericycle (SRCL) as well as payment network provider Discover Financial (DFS).

Top Contributors and Detractors from SMID Moat Index - July 2023

Source: Morningstar, July 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

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.