Moat Stocks Outperform in July Rally

The U.S. officially entered into a recession last month; however, equity markets rebounded in July, with the S&P 500 seeing its best month since November 2020. Markets rallied following stronger than expected earnings for major tech companies and comments from the Federal Reserve indicating a potential pivot to more dovish policy.

Despite major U.S. market indexes having their best month in nearly two years, the Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) outperformed the S&P 500^® Index for the month (9.9% vs. 9.2%, respectively) and widened its outperformance YTD (-7.6% vs. -12.6%, respectively), as of July 31, 2022. Outperformance in July was driven primarily by strong stock selection.

As discussed in last month’s blog, the Moat Index historically has often displayed excess returns relative to the S&P 500 following periods of sizeable declines. That story has played out again thus far in 2022 off the lows set in June. The Moat Index’s focus on companies with competitive advantages and attractive valuations results in a dynamic portfolio that has potential to outperform on both the upside and down side. Since its inception in 2007, the Moat Index has exhibited an up-capture ratio of 107 and a down-capture ratio of 85 when compared to the S&P 500 Index on a quarterly basis.¹

A recent example of this attractive return profile can be seen by looking at monthly returns so far this year. The Moat Index has outperformed the S&P 500 Index in five out of seven months, including during the substantial July rally.

Source: Morningstar. Data represents index monthly total return.

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.

July Moat Index Standouts

Etsy Inc. (ETSY)²

The Moat Index newcomer, first added in March following a sell-off in its share price, was the top contributor to performance in July. Etsy is an e-commerce platform that has carved out an interesting competitive niche, jockeying for wallet share by targeting non-commoditized inventories (artisanal crafts, used musical instruments, vintage clothing resale, etc.). Morningstar views the e-commerce space as here to stay, despite the recent pullback in share prices, with Etsy’s long-term narrative within the space as very compelling as it continues to grow users and expands internationally. Morningstar considers Etsy’s competitive advantage to stem from its network effect, one of the most powerful and rare moat sources. They view the growth seen in Etsy’s marketplace platform as rising in value as buyers and sellers are on-boarded and increasingly use the platform.

Etsy’s share price gained over 40% in July to end the month just over $100 per share, while Morningstar estimates Etsy’s fair value to be $180.

The Boeing Company (BA)³

Another top contributor to performance in July was wide-moat rated Boeing. Boeing is a major aerospace and defense firm that generates revenue primarily from its commercial aircraft manufacturing business. Boeing was added to the Moat Index in March 2020, following its share price decline related to concerns around the impact of a global pandemic on the passenger airliner industry, and has since been featured within the Moat Index.

According to Morningstar, Boeing gains it wide-moat rating based on competitive advantages from both intangible assets and switching costs. Almost all aviation demand is served by two firms—one being Boeing—and as travel demand continues to grow from both easing pandemic lockdowns and the broad growth of the global middle class population, Morningstar expects Boeing to serve that increased global aircraft demand.

Boeing’s share price rose by over 15% in July amid news of Delta placing its first major order with Boeing in more than a decade. Boeing’s share price ended July at $160 compared to Morningstar fair value estimate of $233.

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.