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Lockheed Boosts Moat Index’s Defense

March 09, 2022

Read Time 5 MIN

Blog Summary

The Morningstar Wide Moat Focus Index displayed the defensive characteristics of its methodology, with Lockheed Martin and Corteva among the standout contributors in February.



The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) continued its trend of offering downside protection thus far in 2022 relative to the S&P 500 Index. The Moat Index posted a loss of -1.11% in February, less than half of the S&P 500’s loss of -2.99%. The Index expanded its excess return to 4.66% for the year to date period. Notably, the Index also outpaced both the Russell 1000 Growth Index (-4.25%) and Russell 1000 Value Index (-1.16%) in February.

This is not the first time the Moat Index has displayed its defensive characteristics. In late 2018, as U.S. markets reacted to a breakdown in U.S./China trade talks and a sell-off in tech, the Moat Index held its own by outperforming the S&P 500 Index in the fourth quarter of that year (-10.25% vs. -13.52%, respectively). The Index would finish 2018 with a modest loss of -0.74% compared to the S&P 500 Index’s return of -4.38%. At the end of that year, the Moat Index dialed up exposure to several oversold industries, including chip companies, which contributed in large part to a strong recovery year in 2019.

2008 was another standout year for the Moat Index. Shortly after the Index went live, the global financial crisis struck. The Moat Index’s focus on companies with competitive advantages and attractive valuations allowed it to outpace the S&P 500 Index handily during that tumultuous year (-19.58% vs. -37.00%). Perhaps equally as impressive, the Index’s positioning throughout 2008 allowed it to recover quickly and outpace the S&P 500 Index by more than 20% in 2009. It is worth noting that while the Index was live at the time, it was before its 2016 methodology enhancements, which expanded the number of index holdings and reduced the impact any single stock could have on the portfolio.

While not inherently a low volatility or defensive strategy, the Moat Index’s combination of wide economic moats and attractive valuations have served the Index well through various difficult market periods.

Notable Outperformance in Down Markets and Subsequent Recoveries (%)

  Trade Breakdown Global Financial Crisis Inflation and Geopolitical Conflict
  4Q 2018 2019 2008 2009 YTD 2022
Moat Index -10.25 34.96 -19.58 46.93 -3.35
S&P 500 Index -13.52 31.49 -37.00 26.46 -8.01
Excess Return 3.27 3.47 17.42 20.47 4.66

Source: Morningstar. Data represents index total return. YTD returns as of 2/28/2022.

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. 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.

February Moat Index Standouts

Lockheed Martin (LMT)

Defense contractors have been prominent in the Moat Index since March of 2020, with Lockheed, Boeing, and Raytheon finding their way into the Index due to attractive valuations. A highly competitive industry with large government clients, it would be logical to assume moat stocks are hard to come by. However, Morningstar explains that they exist because of intangible assets—including product complexity that thwarts new entrants, contract structures that reduce risk for the contractor, decades-long product cycles and a lack of alternative suppliers—and the switching costs of a risk-averse customer facing a significant time investment to switch over products.

Lockheed Martin contributed strongly to Moat Index returns in February (Raytheon as well, though with a lower weighting, its total returns effect was slightly less). With the situation in Ukraine, many governments have announced increased defense budgets. Germany and Japan were standouts in that regard, boosting spending to levels not seen in many decades. This drove Lockheed higher at the end of the month.

Morningstar has not yet adjusted its fair value estimate to reflect higher defense budgets. It is awaiting news on the United States’ proposed defense spending for the fiscal 2023 to do so. Morningstar raised Lockheed’s fair value estimate to $419 per share from $402 in late January, but that move was to reflect the dwindling prospects for a corporate tax hike. At the end of February, Lockheed was trading at a premium to Morningstar’s fair value estimate.

Corteva (CTVA)

Corteva reported fourth quarter results at the beginning of February, and operating EBITDA was up 11% year on year. Its share price appreciated steadily throughout the year. Morningstar indicated that price increases outweighed cost inflation and the company sold a greater proportion of higher-margin, premium products. All of that reinforced Morningstar’s thesis that the company would sell a greater proportion of premium seed and crop protection products over time and that would drive profit growth.

Morningstar awards Corteva a wide economic moat rating based on the company’s portfolio of patented biotech seeds and crop chemicals. According to Morningstar, its patented products command pricing power and its intangible assets stem from its R&D spending.

Shares of Corteva finished the month just shy of Morningstar’s fair value estimate of $52 per share.

Meta Platforms (FB)

On the downside, Facebook parent Meta Platforms was the leading detractor from both absolute Moat Index performance and performance relative to the S&P 500 Index. The company reported quarterly results after the close of markets on February 2, sending shares into a freefall on February 3. According to Morningstar, revenue was slightly ahead of expectations, but the firm missed on the bottom line due to higher investments in not only the Reality Labs metaverse segment but also in Reels and in overall improvement of its advertising back-end. Its first quarter 2022 revenue guidance was also below consensus estimates.

Morningstar reduced its fair value estimate for Meta slightly from $404 per share to $400, but stated that they do not think the market’s reaction was warranted. Morningstar believes wide-moat Meta’s shares now present an attractive investment opportunity, with its share price at approximately 50% of Morningstar’s fair value at the end of February.

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

Source for all data unless otherwise noted: Morningstar.

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. Standard Deviation is a historical measure of the variability of returns relative to the average annual return. A higher number indicates higher overall volatility. Sharpe Ratio is a risk-adjusted measure that is calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance. Max Drawdown measures the largest loss from peak to trough in a certain time period. Upside Capture measures whether an index outperformed a calculation benchmark index in periods of market strength. A ratio over 100 indicates an index has generally outperformed the calculation benchmark index during periods of positive returns for the calculation benchmark index. Downside Capture measures whether an index outperformed a calculation benchmark index in periods of market weakness. A ratio of less than 100 indicates that an index has lost less than its calculation benchmark index in periods of negative returns for the calculation benchmark index.

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 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.

The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.

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.

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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 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 ETFs carefully before investing.

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