Moat Stock Valuations Dictate 2022 Positioning
January 06, 2022
Read Time 4 MIN
The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) finished 2021 strong, outpacing the S&P 500 Index (4.85% vs. 4.48%, respectively) in December. Unfortunately, it wasn’t enough to overcome a challenging October and November. The Index gave up the sizable excess return advantage it accumulated through the first nine months of the year in October and November due to its value overweight and its growth and blend underweight. The Index posted a total return of 24.81% in 2021 vs. 28.71% for the S&P 500 Index.
Moat Index Positioning into 2022
The Moat Index underwent its quarterly review on December 17, 2021. Each quarter it systematically targets the most attractively priced wide moat companies in the U.S. The December review resulted in seven companies added and removed from the Index. Here are a few takeaways from this review:
Health Care Moat Exposure Hits Five Year Low
Health care, a long-time Moat Index overweight, is now at its lowest weighting since December 2015 following a 3% decrease in exposure. The sector represented over 30% of the Moat Index for the better part of 2016 through 2018.
First Time Moat Index Members
Two companies were added to the Moat Index for the first time in December:
Honeywell International (HON)
Morningstar views Honeywell as one of the highest-quality companies in the diversified industrials space and attributes its wide economic moat to intangible assets, switching costs and, to a lesser extent, cost advantages. Well known for its building technologies history, Honeywell is far more than a heating and cooling company. Its aerospace division is its widest-moat business, according to Morningstar.
Honeywell has long traded at a premium to Morningstar’s fair value estimate, which has excluded the company from the Moat Index in years past. However, following the release of the company’s third quarter results, Morningstar raised Honeywell’s fair value estimate to $225 per share from $211, opening an opportunity for Honeywell’s price/fair value ratio to qualify for inclusion in December. The increase to Honeywell’s fair value estimate was somewhat contrarian at the time, given that the company’s share price moved in the opposite direction as market participants reacted to short-term supply chain issues impacting the company. Morningstar’s long-term perspective left them unconcerned with the implications of supply chain disruptions on Honeywell’s long-term prospects.
MercadoLibre operates the largest e-commerce marketplace in Latin America. Despite its regional revenue base, the company is incorporated in the U.S. and trades on Nasdaq, making it eligible for the U.S.-focused Moat Index. While some view MercadoLibre as an emerging markets company, it is not uncommon to see the e-commerce giant in U.S. indexes. For example, MSCI includes MercadoLibre in many of its U.S. factor indexes.
The company benefits primarily from a network effect. Its platform grows stronger as new users are onboarded to both sides of the marketplace. Sellers benefit from quicker inventory turnover and access to a larger pool of potential customers, while buyers benefit from better search engine optimization, breadth of selection, and lower shipping costs.
Similar to Honeywell, Morningstar raised MercadoLibre’s fair value estimate in November, opening the door for its inclusion in the Moat Index in December. Shortly following the early November fair value estimate revision, MercadoLibre announced a one million share equity issuance, which drove selling pressure on the stock. Unlike the broader market, Morningstar did not view the announcement as negative, but rather as similar to a historical pattern from MercadoLibre and maintained its increased fair value estimate.
Value and Growth Exposures Increased
Both value and growth style exposures increased following the December review. This drove “core” exposure lower. These are companies that display characteristics of both growth and value according to Morningstar, with neither characteristic dominant. The Moat Index remains significantly overweight to value stocks relative to the S&P 500 Index, modestly underweight growth stocks and increasingly underweight core stocks.
Moat Index’s Value Prominence Remains in Place
Source: Morningstar. Data as of 12/17/2021. Prior Exposure represents the Moat Index prior to the index review as of 12/17/2021. Rebalanced Exposure represents the Moat Index following the Index review effective after the close of markets on 12/17/2021. 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.
Hear It from the Horse’s Mouth
Lastly, I encourage you to join me on our quarterly moat investing webinar on January 11. I’ll be joined by three Morningstar analysts, who will touch on Moat Index performance and quarterly review, and we’ll take a deep dive into a few unique materials and consumer goods companies in the Index. Register for the webinar here.
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.
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.
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 500r® 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.
An investment in the VanEck 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 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.
August 08, 2022
As equity markets rallied in July, strong stock selection was the primary driver of performance for the Morningstar Wide Moat Focus Index, with Etsy and Boeing among the standouts.
July 15, 2022
The Sustainalytics Controversy Score assesses incidents that may have a negative reputational impact and is a factor for inclusion in the Morningstar US Sustainability Moat Focus Index.
July 06, 2022
Historically, the Morningstar Wide Moat Focus Index’s valuation methodology has led to high returns in broad U.S. equities following periods of sizeable market declines.
June 13, 2022
Built with the same approach of the Morningstar Wide Moat Focus Index to target moat companies with attractive valuations, Morningstar’s global indexes have impressed thus far in 2022.