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  • Moat Investing

    Banking on Banks Paid Off for Moat Index

    Brandon Rakszawski, Senior ETF Product Manager
    March 08, 2021
     

    The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) stood out in February, finishing ahead of the S&P 500® Index by more than 3% (6.11% vs. 2.76%, respectively). It was certainly a big month for value stocks as the Russell 1000 Value Index posted a return of 6.04% compared to the Russell 1000 Growth Index’s -0.02% return. Although there was a value story at play for the Moat Index, it wasn’t quite as simple as you may think.

    I’ve discussed the Index’s shift to value throughout 2020, but the Index is far from a pure value strategy. Its focus on valuations often results in exposure to value stocks, but growth stocks have and continue to play an important role in its strategy. For example, the largest sector contribution to the Index’s return in February came from financials, generally a value-heavy sector. Unsurprisingly, financials are also the largest sector overweight in the Index. But, the second highest sector return contribution came from information technology–the Index’s largest underweight and generally synonymous with growth investing. The bigger story may be how the Index’s positioning through the pandemic is now playing out.

    Financials and Tech Drive Moat Index’s February Outperformance

    Financials and Tech Drive Moat Index’s February Outperformance

    Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com.

    Banks Positioning Benefitted Moat Index

    Large banks and brokerages, many of which became Index members or increased in exposure in March 2020, have earned their moment in the spotlight. Led by Charles Schwab (SCHW) and Wells Fargo (WFC), four of the five top contributors to Index performance in February came from the financials sector.

    Schwab is off to a strong start to 2021. Its stock has consistently traded above Morningstar’s fair value estimate of $51 per share in January and February for the first time in years. Some concerns lingered following the dramatic price movements in several heavily shorted stocks in late January, as brokerages can be exposed to losses related to customers trading on margin. But those fears were dissuaded following management’s disclosure that any losses were not material. Morningstar also noted that Schwab’s winter business update pointed to better than expected merger synergies with TD Ameritrade. Its fair value estimate has remained stable since the beginning of the year.

    WFC announced in late February the intended sale of their asset management business to two private equity firms. The deal size came in lower than Morningstar’s expectations, but the unit represents only about 2% of WFC’s overall revenue. Morningstar has maintained its $45 per share fair value estimate that has been in place since October 2020. The bank has recovered from discounts to Morningstar’s fair value estimate of greater than 50%, but remains undervalued according to Morningstar.

    Bank of American (BAC) and US Bancorp (USB) were both added to the Moat Index following the market turmoil of March 2020. BAC managed to remain profitable through the pandemic, and USB saw its fair value estimate raised at the end of February 2021. Both now trade above their Morningstar fair value estimate—a stark contrast to when both stocks entered the Index at approximately 25% discount to fair value in March 2020.

    Finding Value in Tech

    Apple (AAPL) is one tech company that has never been a member of the Moat Index, owing to its narrow moat rating from Morningstar’s equity research team. Truth be told, lack of exposure to AAPL has been to the detriment of the Moat Index’s returns for the better part of the last several years. However, it certainly helped relative performance in February though the Index’s tech exposure was more than an AAPL story. Three of the top 10 contributors to Index return were chip companies: Applied Materials (AMAT), Lam Research (LAM) and Intel (INTC). All three finished February trading above or very near Morningstar’s fair value estimate.

    This isn’t the first time chip companies left their mark following turmoil in the markets. In late 2018 amidst U.S./China trade tensions, the tech sector sold off, resulting in increased Index exposure to chip makers as valuation opportunities presented themselves in the industry. Some were top contributors to the Index’s strong 2019. Most recently, chip companies took a more prominent position in the Moat Index starting in September 2020, with the introduction of LAM and increased weighting of AMAT in addition to several other chip companies already in the Index at the time.

    Trailing Return (%) as of 2/28/2021

      1 Mo YTD 1 Yr 3 Yr 5 Yr 10 Yr
    Morningstar® Wide Moat Focus IndexSM 6.11 5.50 32.69 17.29 19.87 15.41
    S&P 500 Index 2.76 1.72 31.29 14.14 16.82 13.43

    Periods greater than one year reflected annualized returns. Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit vaneck.com.

    Health care was the only sector causing a notable drag on Index returns. Cerner Corp (CERN), Gilead Sciences (GILD), Pfizer (PFE), and Merck (MRK) were among the worst performing members of the Moat Index in February.

    VanEck Vectors 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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    Important Disclosures

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/moat/holdings/.

    An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

    Fair value estimate: the Morningstar analyst's estimate of what a stock is worth.

    Price/Fair Value: ratio of a stock's trading price to its fair value estimate.

    The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.

    The Morningstar® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.

    Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.

    The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

    Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected and historical growth rates.

    The Russell 1000 Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

    An investment in the VanEck Vectors Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in equity securities, consumer discretionary, consumer staples, financials, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

    Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck Vectors ETFs carefully before investing.

  • Authored by

    Brandon Rakszawski
    Senior ETF Product Manager

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