SMID-Cap Moats Outpace Large-Caps in August

Key Takeaways:

• Moat Index rose 1.7%, with semis & healthcare offsetting energy headwinds.
• Monolithic Power and Zimmer Biomet were top Moat Index contributors.
• SMID Moat Index gained 3.1%, outpacing large-cap and equal-weight peers.
• Wynn Resorts and Expedia led SMID Moat gains as consumer demand stayed strong.

In August, U.S. equity markets extended their summer rally, posting a fourth consecutive month of gains as the S&P 500 advanced 2.0% to notch another record high. Market momentum was supported by continued strength in corporate earnings, resilient consumer spending, and moderating inflation data. Investor optimism was tempered somewhat by ongoing trade negotiations and a mixed set of labor market readings, which revealed both steady job growth and further downward revisions to prior reports. Most sectors posted gains in August, with Materials and Healthcare leading the way. The Federal Reserve held interest rates steady for a third consecutive meeting, though expectations for potential cuts later this year grew stronger as inflation pressures eased. Additionally, small cap leadership signals a healthier, broader rally beyond mega-cap tech.

The Morningstar Wide Moat Focus Index (the “Moat Index”) participated in the August rally along with the broader equity market, posting a gain of 1.7% for the month. The Moat Index lagged the S&P 500 and equal weighted benchmarks slightly, which returned 2.0% and 2.7%, respectively. The strategy continues to provide differentiated exposure, which has become increasingly difficult for investors to find, amid historical levels of concentration in the U.S. equity markets.

Small cap stocks saw advances during the month, as comments by the Fed at the Jackson Hole symposium reignited hopes for rate cuts and boosted rate-sensitive small caps. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) posted a 3.1% gain in August, outpacing both large-cap and equal weighted benchmarks.

Small Caps Lead the Pack in August

Source: Morningstar. Data as of 8/31/2025. 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. Please see index definitions and other important disclosures at the end of this content. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

Moat Index August Highlights: Semiconductors and Joints Drive Gains

In August, sector positioning, more than individual stock selection shaped the Moat Index’s performance. Energy extended its rebound on higher oil prices and strong commodity demand, and the Moat Index has no exposure to this sector. However, positive stock selection within the health care segment as well as strong earnings from several moat companies helped offset sector exposure headwind.

Wide-moat semiconductor producer Monolithic Power Systems (MPWR) was the top contributor to the Moat Index in August, with second-quarter results beating guidance, and management provided a strong third-quarter outlook. Revenue rose 31% year over year and 4% sequentially to $665 million. The midpoint of third-quarter guidance implies 16% year-over-year and 8% sequential growth. Morningstar believes Monolithic Power Systems is a disruptor in the power management chip market, using its proprietary process technology to differentiate from larger competitors. With ramps of new products in data centers and autos, Morningstar raised its fair value estimate to $804 per share after raising their medium-term growth forecast.

Healthcare manufacturer Zimmer Biomet (ZBH) was also a key contributor to Moat Index performance in August, with shares gaining on the back of strong quarterly results and guidance. The firm continues to make steady progress in its core businesses, helped along by adoption of innovation in its hip and knee devices. As the undisputed king of large-joint reconstruction, Morningstar expects aging baby boomers and improving technology suitable for younger patients to fuel solid demand for large-joint replacement that should offset price declines. Morningstar maintains a $130 fair value estimate, as lower tariff burden and working capital improvements are largely offset by the higher cost of absorbing Paragon 28. Shares seem moderately undervalued.

Other top contributors within the Moat Index during the month include semiconductor testing company, Teradyne (TER), global technology leader, Alphabet (GOOGL), as well as chip maker, NXP Semiconductors (NXPI).

Companies detracting the most in August came from a mix of sectors, with technology and financials each accounting for two of the five names on the list. Notable detractors included Applied Materials (AMAT), software giant Oracle (ORCL), fixed-income trading platform MarketAxess (MKTX), credit reporting agency TransUnion (TRU), and International Flavors & Fragrances. (IFF).

Moat Index Top Contributors and Detractors - August 2025

Contributors

Detractors

Source: Morningstar. 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.

SMID Moat Index August Highlights: Gaming and Travel Lead the Way

The SMID Moat Index performance in August was driven by strong stock selection across several parts of the portfolio. Consumer discretionary was the standout area, with four of the month’s top five contributors coming from this sector. Amid the Federal Reserve drama and deluge of corporate earnings in August, one clear but overlooked trend emerged in U.S. equities: the rotation out of expensive tech stocks and into cheaper small caps, with a S&P SmallCap 600 index monthly gain of 7.1%.

Wynn Resorts (WYNN) topped the SMID Moat Index in August, as the company continues to see resilient demand despite an uncertain economic landscape. Macao gaming revenue saw a 19% rise in July. Morningstar believes the company's focus on a premium offering continues to resonate with consumers. In Macao, demand continues to gradually recover, with Wynn's high-end iconic brand positioned to participate, leading to a low-teens percentage gross gaming revenue share in 2024. Morningstar raised its fair value estimate from $107 to $110 on improved 2025 Macao revenue.

Expedia Group (EXPE), the leading global online travel company, was also a top contributor to SMID Moat Index performance in August, with the catalyst being an announcement of a partnership with a leading cloud provider to enhance its booking platform’s capabilities. Over the past two decades, Expedia has built a strong network of properties (the supply side of the network effect equation), which has driven strong end-user traffic and bookings (demand side of the network effect equation). After reviewing second-quarter results, Morningstar has increased their fair value estimate from $207 to $222 to reflect higher sales in 2025.

Companies detracting the most in August from the SMID Moat Index included two names from industrials, with CNH Industrial (CNH) and critical digital infrastructure provider Vertiv Holdings (VRT) weighing on performance during the month. Other notable laggards were semiconductor company Marvell Technology (MVRL), MarketAxess Holdings (MKTX), and real estate investment trust SBA Communications (SBAC).

SMID Moat Index Top Contributors and Detractors - August 2025

Contributors

Source: Morningstar. 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.

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