Moat Stocks Hit Pause Following Strong Year
February 08, 2024
Read Time 6 MIN
Equity markets started the year with a cautious tone following the blistering rally seen in the final quarter of 2023.Large caps regained their leadership position in January with the S&P 500 Index up slightly on the month, while small caps slid nearly 4%. Much of the negative price action of smaller companies came on the back of hawkish language during the January Fed meeting that pushed back expectations for interest rate cuts. However, strong performance by the familiar mega caps helped buoy the market but has also reignited concerns around narrow market leadership.
After outperforming the S&P 500 Index by more than 6% in 2023, the Morningstar Wide Moat Focus Index (the “Moat Index”) returned some of that relative outperformance to begin the new year. The Moat Index fell 1.75% during January, compared to the S&P 500 which returned 1.68%. The Equal Weight S&P 500 Index was also down during month, nearly 1%, highlighting the continued dominance of the mega cap “Magnificent Seven” cohort.
Smaller-cap companies gave back some relative performance versus their large-cap peers after having outperformed during the fourth quarter rally of last year. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) fell 2.77% in January, landing squarely in between the performance of the pure small and mid cap broad benchmarks.
U.S. Equities Cautious After 4Q 2023 Rally | As of 1/31/2023
Source: Morningstar. As of 1/31/2024. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.
Moat Index Top Contributors and Detractors
Underperformance of the Moat Index was in part due the Index’s equal-weight methodology, which leads to structural under-exposure to mega caps, but stock selection and earnings-related volatility also proved impactful during the month. Volatility around earnings results was also a theme that impacted the Moat Index last year during the third quarter as well. However, many of those companies went on to rebounded in the subsequent quarter. TransUnion (TRU) was one such example of this.
MarketAxess (MKTX)
This month MarketAxess was the largest detractor to performance and the primary example of the above mentioned earnings-related volatility. MKTX released their fourth-quarter earnings results on January 31st with shares of the company down nearly 18% on the day. Despite the disappointing earnings, Morningstar analyst Michael Miller did not anticipate any material change to his $305 fair value estimate for MarketAxess and viewed the company as undervalued following the news.
Morningstar Analyst Comments | by Michael Miller, CFA - January 31, 2024
Wide-moat-rated MarketAxess reported decent fourth-quarter results that were largely in line with our expectations as the firm benefited from higher trading volume industrywide. The firm's uninspiring market share performance, however, remains a concern. Fourth-quarter revenue increased 10.9% to $197.2 million, or 6.6% when adjusted for the acquisition of Pragma. Meanwhile, earnings per share increased 16.5% to $1.84 from $1.58 last year, although the company did benefit from an unusually low provision for income taxes in the quarter. As we incorporate these results, we do not plan to materially alter our $305 per share fair value estimate for MarketAxess, and we see the shares as undervalued at current prices.
RTX Corp (RTX)
On the more positive side of the earnings releases this month was aerospace and defense company RTX which beat expectations leading to an 8% share price gain in January. This price action landed RTX in the top slot in terms of contribution to performance for the Moat Index during the month. Morningstar analyst Nicolas Owens maintained his $112 per share fair value estimate following the release and noting that company is well positioned for secular growth in commercial aerospace.
Top Contributors and Detractors from Moat Index - January 2024
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| RTX Corp | RTX | Industrials | 2.46 | 0.20 |
| Salesforce Inc | CRM | Information Technology | 2.65 | 0.18 |
| Veeva Systems Inc | VEEV | Health Care | 2.32 | 0.18 |
| Comcast Corp | CMCSA | Communication Services | 2.34 | 0.16 |
| The Walt Disney Co | DIS | Communication Services | 2.36 | 0.15 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| MarketAxess Holdings Inc | MKTX | Financials | 2.74 | -0.63 |
| Etsy Inc | ETSY | Consumer Discretionary | 2.66 | -0.48 |
| Teradyne Inc | TER | Information Technology | 2.70 | -0.30 |
| The Estee Lauder | EL | Consumer Staples | 2.35 | -0.23 |
| Charles Schwab Corp | SCHW | Financials | 2.65 | -0.23 |
Source: Morningstar, January 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
SMID Moat Index Top Contributors and Detractors
The smaller cap SMID Moat Index also experienced a bit of turbulence from earnings related volatility this month. Beyond MarketAxess, which was already covered above, diversified global specialty chemicals company DuPont (DD) was also under pressure following disappointing earnings and lower 2024 guidance. While Morningstar analyst Seth Goldstein, CFA reduced his fair value estimate from $90 to $85, he still views DuPont shares as undervalued.
Morningstar Analyst Comments | by Seth Goldstein, CFA - January 24, 2024
At current prices, we view DuPont shares as undervalued, with the stock trading in 4-star territory. We point to the recovery of the electronics business as a catalyst for shares throughout the year. In the release, management said the semiconductor technology business generated sequential revenue growth. This is in line with our long-term view that DuPont should benefit from solid demand for its products that are used to make semiconductors and interconnected solutions. A return to growth in the electronics business, which generates the majority of profits, should support the stock.
Names that positively contributed to the SMID Moat Index performance during the month include news and sports focused broadcast network Fox Corp (FOXA) and life sciences cloud-based software solutions company Veeva Systems (VEEV). The Financials sector was also well represented within the top contributors with Bank of New York Mellon (BK) and Interactive Brokers Group (IBKR) both up over 7% in January.
Top Contributors and Detractors from SMID Moat Index - January 2024
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Fox Corp | FOXA | Communication Services | 1.20 | 0.11 |
| Bank of New York Mellon | BK | Financials | 1.39 | 0.10 |
| Veeva Systems Inc | VEEV | Health Care | 1.23 | 0.09 |
| Marvell Technology Inc | MRVL | Information Technology | 0.73 | 0.09 |
| Interactive Brokers Group | IBKR | Financials | 1.18 | 0.08 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| MarketAxess Holdings Inc | MKTX | Financials | 1.45 | -0.34 |
| DuPont de Nemours Inc | DD | Materials | 1.30 | -0.21 |
| Brunswick Corp | BC | Consumer Discretionary | 1.48 | -0.15 |
| Zebra Technologies Corp | ZBRA | Information Technology | 1.38 | -0.19 |
| Teradyne Inc | TER | Information Technology | 1.43 | -0.18 |
Source: Morningstar, January 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
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Important Disclosures
Source for all data unless otherwise noted: Morningstar.
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.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
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/.
Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/smot/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.
The Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc.
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. Past performance is no guarantee of future results.
The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap IndexSM is a broad based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar.
The S&P SmallCap 600 Index represents small-cap US companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized US companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector. The S&P 500 Equal Weighted Index which is an equally weighted version of the market-cap weighted S&P 500 Index.
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 © 2024 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.spglobal.com/spdji/en/. 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, risks related to investing in equity securities, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, 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 index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, 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-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and 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 the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
Important Disclosures
Source for all data unless otherwise noted: Morningstar.
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.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
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/.
Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/smot/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.
The Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc.
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. Past performance is no guarantee of future results.
The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap IndexSM is a broad based index intended to track the overall performance of U.S. small- and mid-cap companies according to Morningstar.
The S&P SmallCap 600 Index represents small-cap US companies. The S&P Midcap 400 Index provides investors with a benchmark for mid-sized US companies. The S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector. The S&P 500 Equal Weighted Index which is an equally weighted version of the market-cap weighted S&P 500 Index.
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 © 2024 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.spglobal.com/spdji/en/. 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, risks related to investing in equity securities, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, 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 index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, 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-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and 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 the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.