Keepin’ it Contrarian: Moat Index Adds Health Care, Reduces Tech

The Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) underwent its quarterly review on December 20, 2024. The Index’s review process systematically targets attractively priced, high quality U.S. companies, as identified by Morningstar’s equity research analysts. Below are a few key takeaways from the December review and how the Moat Index is positioned following a U.S. presidential election and shifting market sentiment. The full review results are available here:

Moat Index Review Takeaways:

• Health Care Top Overweight, Tech Even Larger Underweight

  The Moat Index pared back some of its industrials exposure as a result of less attractive company valuations and increased its health care exposure by dialing up the weight of one existing constituent and adding four new health care companies to the Index. Health care is currently one of the most undervalued sectors in the U.S. equity market, according to Morningstar’s analysis. The Moat Index’s underweight to the tech sector became more pronounced. Strong performance from several software companies allowed the Moat Index to systematically lock in gains and remove or scale down these companies’ positions.

• Style Trends: Blend is Top Exposure, Value Increased and is Largest Overweight, Growth Decreased

  The S&P 500 Index continued to reach all-time highs throughout the fourth quarter gaining significant momentum following the U.S. presidential election. As mega caps continue to dominate its makeup and its returns, the S&P 500’s growth style dominance remains on full display. Most importantly, the largest mega cap companies are becoming an increasingly larger part of investor portfolios. The Moat Index’s contrarian nature has led its exposure toward attractively priced companies which has resulted in a value bias relative to the headline large cap index and allows investors to meaningfully participate in the U.S. equity market with the added benefit of portfolio diversification. To illustrate the point, as of December 20^th, the “Magnificent 7” accounted for over one third of the S&P 500’s weight while they only represented about 5.5% among three companies.

• U.S. Equity Exposure Without the Lofty Valuations

  Further to the diversification point above, the price/fair value ratio of the S&P 500 Index currently sits at 1.07. This implies that the companies in the S&P 500 are, overall, trading at approximately a 7% premium to fair value, according to Morningstar. This presents a challenge for investors grappling with these lofty valuations and portfolio concentration. The Moat Index represents high quality companies currently mispriced by the market, in Morningstar’s view. It allows investors to consider a mix of well-positioned companies with upside potential that differ substantially from existing core portfolio positions. Currently, the Morningstar price/fair value ratio of the Moat Index is 0.83, implying a 17% discount to fair value.

• New Names

  There were two companies that were added to the Moat Index for the first time in its over 17-year history:

  West Pharmaceutical Services (WST): West Pharmaceutical has long traded at a premium to its fair value estimate and just recently became attractively priced enough to warrant inclusion in the Moat Index. West is a major player in the injectable pharmaceutical packaging market. West Pharmaceutical is required to coordinate closely with and develop trust from pharmaceutical customers to ensure stability, purity, and sterility of drugs to meet regulatory standards. West has a large market share in elastomer components for injectable drugs and benefits from the high switching cost associate with its customers disrupting their existing supply chain.

  Danaher Corporation (DHR): Danaher is a unique Moat Index entrant in that it was just upgraded from a narrow moat rating to wide moat rating in November 2024. Its upgrade reflects the long durability of its customer switching costs, according to Morningstar, in addition to their strong intangible assets. This upgrade to its moat rating also boosted the length of time Morningstar expects Danaher to remain profitable, ultimately pushing their fair value estimate higher. This illustrates Morningstar’s integrated research process by which moat ratings influence valuations. Danaher manufactures scientific instruments and consumables in the biotech, life sciences, and diagnostics industries.

4Q 2024 Moat Index Review Results

Moat Index Sector Shifts Following 4Q 2024 Review

Moat Index Sector Exposure Relative to S&P 500 Index

Moat Index Style Exposure Relative to S&P 500 Index: Value Bias Persists

Access Quality Companies and Attractive Valuations

VanEck Morningstar Wide Moat ETF (MOAT) and VanEck Morningstar Wide Moat Fund seek to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

Source for all data unless otherwise noted: Morningstar.