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As Moat Stocks Rebound, Inflation Looms

VanEck
·9 min read

This article was originally published on ETFTrends.com.

By Brandon Rakszawski, Senior ETF Product Manager, VanEck

The Morningstar® Wide Moat Focus IndexSM (the “Index”) finished an up-and-down January slightly negative for the month but ahead of S&P 500® Index by more than 40 basis points (-0.58% vs. -1.01%, respectively). The tech, health care and energy sectors all contributed positively to Index returns, offsetting much of the negative returns from industrials, financials and consumer staples. In addition to January performance highlights, this month I’ll also touch on something that had been relegated to the backburner for quite some time but may now be coming to the forefront: inflation.

It’s all Relative for Moat Stocks to Start 2021

As speculation in a small number of stocks drove market headlines toward the end of the month, the Index quietly saw a reversal of the trends that led to 2020 underperformance. Several information technology companies in the Index posted encouraging returns in January, following a disappointing 2020, and others from vulnerable sectors also bounced back. Though negative as of the end of January, the Index is off to a good start relative to the S&P 500 Index.

Trailing Return (%) as of 1/31/2021

1 Mo

3 Mo

1 Yr

3 Yr

5 Yr

10 Yr

Morningstar Wide Moat Focus Index

-0.58

17.84

16.07

13.21

19.67

15.08

S&P 500 Index

-1.01

14.05

17.25

11.70

19.16

13.50

Periods greater than one year reflected annualized returns. Source: Morningstar. 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.

Blackbaud, Inc. (BLKB) is a software company deeply entrenched in the nonprofit ecosystem, providing CRM, financial management and analytics solutions across the board. It benefits from high customer switching costs and, to a lesser extent, intangible assets, according to Morningstar. Blackbaud’s nonprofit customers are likely especially sensitive to budgetary issues and the potential costs of changing software make a switch less likely than in other industries. After beginning January trading at a nearly 18% discount to Morningstar’s fair value estimate, Blackbaud’s share price finished the month at less than a 5% discount.

Intel Corp. (INTC) is another tech company that struggled in 2020, particularly in the second half of the year, as it traded as low as 66% of its Morningstar fair value estimate. Its strong January combined with a fair value estimate decrease resulted in its discount to fair value narrowing considerably, but the company’s stock remained attractively priced. The driving force behind Intel’s impressive January was fourth quarter results that significantly exceeded expectations, according to Morningstar. Increased PC demand in the continued work- and learn-from-home environment due to COVID-19 helped support Intel’s fourth quarter results.

Consumer discretionary stock Polaris Inc. (PII) also experienced a strong bounce back following a trying 2020 when it faced demand concerns for its recreational vehicles through the pandemic-induced economic slowdown. Its fourth quarter financial results impressed the market, driving shares above fair value by the end of the month, even after Morningstar increased its fair value estimate to $113 per share from $100. The increase in fair value reflected Polaris’ robust fourth quarter 2020 performance and an adjustment to its 2021 outlook, which handily outpaced prior expectations, according to Morningstar.

What Drove Moat Index Returns?

Information technology companies contributed most significantly to the Index’ underperformance of the S&P 500 Index in 2020. The sector’s underweight paired with poor relative stock selection within the sector dragged on relative returns. Industrials stock selection was also a major contributor to underperformance while strong stock selection within consumer discretionary, energy and financials helped offset some of the Index’s short-term misses.

Inflation Inflection and What It Means for Moat Stocks

As we look forward, inflation appears to be on the mind of many investors these days. It has been quite some time since we’ve experienced any serious level of inflation in the U.S., but more investors seem to be considering its potential impact on their portfolio. Historically, large cap U.S. stocks have weathered inflationary environments better than other asset classes, but not all companies are immune from rising costs.

Some areas of the equity markets stand to benefit from rising inflation, such as commodity-related materials and industrials companies and those involved in real estate. Other more defensive sectors, such as utilities with steady cash flows, are expected to be negatively impacted by inflation. Because the Index’s focus on valuations has shifted its sector exposure over time, predicting how it will be positioned when inflation takes center stage is hard.

More important to a broad-based core U.S. equity strategy may be the types of companies selected within sectors and industries. Focusing on those companies that have built sustainable competitive advantages may serve investors well if and when inflation does in fact rise. Many of these wide moat companies have pricing power that allow them to pass rising costs to consumers. In at least some way, all five sources of economic moat identified by Morningstar contribute to a company’s pricing power and expected ability to maintain profitability into the future.

VanEck Vectors 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, 2/4/21

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.

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 Vectors 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.

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 Vectors 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 Vectors 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 Vectors ETFs carefully before investing.

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