Moat Stock Selection Stands Out in Q1

The success of the Morningstar Wide Moat Focus Index has long been driven by stock selection, which again proved to be the case in the first quarter of 2022.

The Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) remains ahead of the S&P 500 index by nearly 3% in 2022 (-1.80% vs. -4.60%, respectively), as of 3/31/2022. This is despite trailing the S&P 500 in March (1.61% vs. 3.71%, respectively). The flagship market index was driven higher by its outsized exposure to growth-oriented companies, which performed well for the month.

Compelling 2022 Performance (%)

Source: Morningstar. Data represents index total return. YTD returns as of 3/31/2022.

Index performance is not illustrative of Fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333. Past performance is no guarantee of future results. Indexes are unmanaged and are not securities in which an investment can be made.

Moat Stock Selection Story Continues

The success of the Moat Index has long been driven by stock selection as opposed to strong sector, size or style bets. That story continued in the first quarter as its outperformance was driven by strong stock selection within its sector allocations. For example, its overweight to materials companies contributed to outperformance, but it’s selection within materials (Corteva and Compass Minerals) was the leading influence on excess returns for the quarter. The Index’s underweight to financials companies was a drag on relative returns, but its selection within the sector was a boon to excess returns. Overweight positions in companies like Berkshire Hathaway, BlackRock, Wells Fargo and T. Rowe Price all helped the Moat Index weather the difficult start to the year.

The information technology sector was the most notable exception to the Index’s strong stock selection. Its underweight to Apple (due to its narrow moat rating from Morningstar) and overweight to Blackbaud, Tyler Technologies and Guidewire Software all contributed strongly to the Index’s poor tech stock selection for the quarter. Despite this exception, stock selection was the driver of overall outperformance during the period.

Even when looking at style exposures, stock selection was key. I’ve written extensively about the Moat Index’s value-bias, which has developed over time and in earnest in 2020 and early 2021. However, the Moat Index’s significant value overweight doesn’t explain first quarter excess returns nearly to the extent that stock selection within those style allocations does.

We discuss this and more on our recent quarterly webinar with Morningstar’s equity research analysts. Check out the replay here: Defensive Characteristics on Display.

Key Takeaways from the Moat Index’s Q1 Review

The Moat Index underwent its regularly scheduled quarterly review on March 18, 2022. The Index reassessed valuation opportunities among U.S. wide moat companies and allocated to the 40 with some of the most attractive prices relative to their Morningstar-assigned fair value estimate. Below are a few key takeaways from the review.

Style Exposure Shift

The Index’s growth style exposure increased following the addition of several software and consumer companies. This increased growth exposure came at the expense of traditional value exposures that became a bit too rich to remain in the Index. Despite this modest shift toward growth companies, value remains the largest style exposure in the Index, and the Moat Index remains significantly overweight value relative to the S&P 500 Index.

Sectors Fall More In Line with Market

Due in part to the distribution of wide moat ratings among sectors and in part to valuation opportunities at any given time, the Moat Index has been significantly overweight and underweight certain sectors at a time historically. For example, as recently as 2018, the healthcare sector represented over 30% of the Index. Following the March review, its largest overweight was 6.4% to the consumer staples sector and its largest underweight was only 5% from the financials sector.

Four Moat Index Newbies

Not often do we see companies enter the Moat Index for the first time. The Index has been operating for over 15 years, and companies with wide moat ratings tend to maintain them. This quarter, four companies were added to the Index for the first time:

• 3M: the Industrials giant had previously never presented enough of a relative valuation opportunity to be included in the Index.
• Costar Group: this real estate data and listings platform provider has long been assigned a wide moat rating, but has never been selected for Index inclusion based on the price/fair value screen.
• Teradyne: Morningstar initiated coverage of the semiconductor test equipment supplier in December 2021, making it eligible for inclusion in March as valuations became attractive.
• Etsy: similarly, Morningstar initiated coverage of the unique e-commerce platform in November 2021 and added the company following a sell-off in its share price.

View the full results of the quarterly review here.

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.

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