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Moat Investing: Capturing Opportunity Amid Volatility

·9 min read

This article was originally published on ETFTrends.com.

By Brandon Rakszawski
Senior Product Manager

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 was another volatile month with sizeable declines in the U.S. equity market; however, the Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) proved more resilient than the broad market. The Moat Index outperformed the S&P 500® Index for the month (-7.48% vs. -8.25%, respectively) and furthered its outperformance YTD (-15.92% vs. -19.96%, respectively), as of June 30, 2022.

Rebalancing into Opportunity

Market volatility can be the cause of turmoil for many investors, but for the Moat Index, it can provide potential to capture opportunity in irrationally oversold stocks. At each regularly scheduled quarterly review, the Index reassesses valuation opportunities among U.S. wide moat companies and allocates to those with the most attractive prices relative to their Morningstar-assigned fair value estimate.

The Index’s most recent review took place on June 17. This is noteworthy, as it took place nearly concurrent to the S&P 500 Index marking a fresh low for 2022 and officially entering bear market territory. Historically, the sort of valuation opportunities captured by the Moat Index during periods of sizeable U.S. equity market declines have led to elevated excess returns over broad U.S. equities in the following periods.

Sizeable Market Declines Have, on Average, Preceded Excess Returns

2/28/2007 - 5/31/2022

Sizeable Market Declines Have, on Average, Preceded Excess Returns: 2/28/2007 - 5/31/2022
Sizeable Market Declines Have, on Average, Preceded Excess Returns: 2/28/2007 - 5/31/2022

Source: Morningstar. Data as of 5/31/2022. All returns are annualized.

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.

Key Takeaways from the Moat Index’s Q2 Review

As mentioned above, the Moat Index underwent its regularly scheduled quarterly review on June 17, 2022. Below are a few key takeaways from the review.

Index Valuation Drops to Near Five-Year Lows

As of June 17, 2022, the reconstituted Moat Index exhibited a weighted average Price/Fair Value ratio (“P/FV”) of 0.64 signaling a 36% discount to Morningstar’s assessment of fair value. This is in contrast to the S&P 500 Index, which featured a weighted average P/FV ratio of 0.82 for the same date. For context, the Morningstar Wide Moat Index’s five year average P/FV was 0.87 and S&P 500 Index’s was 1.03 and they dropped as low as 0.62 and 0.77 over the last five years, respectively, in March 2020.

Style Exposure and Sector Shifts

Similar to the previous review in March, the Index’s growth style exposure again saw a notable increase representing valuation opportunities among wide moat growth stocks following the volatility of the past several months. The increase in growth exposure was at the expense of value exposure, which declined by a roughly equal amount. However, value remains notably overweight relative to the S&P 500 Index.

From a sector perspective, the Index saw several consumer staples companies removed this quarter (Campbell Soup Co. and Constellation Brands, among others) due to rich valuations. This reduced consumer staples exposure from the Index’s largest overweight to a now only slight overweight relative to the S&P 500 Index. The industrial sector is now the largest overweight and energy the greatest underweight following the June review.

Index Newcomers

Once again this quarter, despite not often seeing new companies enter the Moat Index for the first time, a few names were added to the Index for the first time in its over 15 year live history. Three companies were added to the Index for the first time, in Q2 2022.

  • Rockwell Automation (ROK): Added to the Index for the first time since being upgraded to wide moat from narrow in December 2012. The industrials automation firm had previously not presented enough of a relative valuation opportunity to be included in the Index.

  • TransUnion (TRU): Now joining Equifax within the Index, TransUnion has had a wide moat rating but had never been selected for Index inclusion based on the price/fair value screen.

  • Workday Inc. (WDAY): A cloud-only human capital management software provider, Workday Inc. was added for the first time since being upgraded from a narrow to wide moat rating in August of 2020.

View the full results of the most recent quarterly review 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.

Originally published by VanEck on 6 July 2022.

For more news, information, and strategy, visit the Beyond Basic Beta Channel.

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.

Morningstar Ratings: When applicable, ratings shown when the ETF is rated three stars or more for any given period. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics.

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.

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.

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 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.

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, 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.

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