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  • Moat Investing

    Health Care and Tech Stocks Weigh on Moat Index

    Brandon Rakszawski, Senior ETF Product Manager
    September 10, 2021
     

    The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) underperformed the S&P 500® Index in August (1.43% vs. 3.04%, respectively). The final month of summer marked the third consecutive month the Index lagged the S&P 500 Index, but it remained ahead by 2.5% year to date through August (24.47% vs. 21.95%, respectively).

    As is typically the case, the Moat Index’s relative performance was influenced predominantly by stock selection and its selection within the health care and information technology sectors was the most influential for the period.

    Aspen Technology: Revenue Miss, But Moat Stock Remains on Solid Footing

    Aspen Technology (AZPN) provides automation solutions to customers in complex industrial environments, lending to Aspens’ high customer switching costs that support its wide moat rating from Morningstar. Aspen reported a decline in quarterly revenue in mid-August and its shares sold off rapidly thereafter.

    While some customer segments, such as refining and chemicals saw signs of life, others remain in a subdued demand environment, and management projected a back-end loaded 2022, according to Morningstar.

    Despite near-term hurdles, Morningstar increased Aspen’s fair value estimate in August from $145 per share to $151 and remains confident in the underlying value and applicability of Aspen’s solutions, as is reflected in Aspen’s full pipeline and continuing and increasing customer engagement. Shares of Aspen finished August at a 14% discount to its fair value estimate, according to Morningstar.

    Zimmer Biomet: Health Care Moat Company Lingers in Waiting Room

    Zimmer Biomet (ZBH) is a medical device company specializing in the implants used in large joint reconstruction. Because the extensive instrumentation, or tool sets, used to prepare bones and install implants are specific to each company, there are significant switching costs applicable to an orthopedic surgeon when choosing a new device manufacturer. Not only can the process be costly and time consuming for the surgeon, there is reputational risk at stake when learning a new process or procedure related to surgery. This switching cost is the primary driver Morningstar attributes to Zimmer Biomet’s wide economic moat.

    The firm reported somewhat disappointing second quarter results at the beginning of August. Management attributed this to the unevenness of large joint replacement patients returning for treatment following a prolonged period of postponed elective medical procedures in the U.S. Morningstar was uncertain about this line from Zimmer Biomet’s management, as rival wide moat firm, Stryker Corp., was apparently not impacted by such trends.

    Nonetheless, Morningstar did not see anything to suggest Zimmer Biomet’s wide moat was impaired in any way and left its fair value estimate in place pointing to a 20% discount to fair value for shares at the end of August.

    Diagnosis Not all Bad in Health Care and Tech Moat Stocks

    Ironically, the leading contributors to Moat Index returns in August were also from the health care and information technology sectors. These companies, which included ServiceNow, Salesforce.com, Alphabet Inc., Pfizer and Facebook, among others, were not enough to overcome other detractors for the month when compared to the S&P 500 Index.

    Morningstar Wide Moat Focus Index Leaders and Laggards – August 2021

    Leading Contributors to Return

    Company Ticker Sector Contribution (%)
    ServiceNow Inc. NOW Information Technology 0.28
    Salesforce.com Inc. CRM Information Technology 0.24
    Alphabet Inc. GOOGL Communication Services 0.21
    Pfizer Inc. PFE Health Care 0.20
    Facebook Inc. FB Information Technology 0.17

    Leading Detractors from Return

    Company Ticker Sector Contribution (%)
    Aspen Technology AZPN Information Technology -0.27
    Zimmer Biomet Holdings Inc. ZBH Health Care -0.19
    Cerner Corp. CERN Health Care -0.12
    Constellation Brands Inc. STZ Consumer Staples -0.12
    Polaris Inc. PII Consumer Discretionary -0.11

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

    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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    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.

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    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.

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  • Authored by

    Brandon Rakszawski
    Senior ETF Product Manager

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