With the capital markets in the second month of 2019 after a tumultuous year-end to 2018, it’s been a strong start for the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which is up 10 percent to start the year.
The rise comes after U.S. stocks posted their worst year in a decade after what was a rough 2018 for U.S. equities with the Dow losing 5.80 percent, while the S&P 500 shed 6.5 percent and the Nasdaq Composite down over 4 percent. Despite the challenges near the end of the year, MOAT gave investors the right exposure at just the right time.
The strategy avoided companies in a downtrodden tech sector that was further exacerbated at the close of 2018. However, it was MOAT that concentrated on more defensive sectors like healthcare ahead of 2019.
Last week, the Labor Department reported that job growth during the month of January bested expectations as nonfarm payrolls gained 304,000. A number of those positions were in the healthcare sector.
“Healthcare was the top sector contributor to returns of the U.S. Moat Index for the year and saw its weighting adjusted in December accordingly as several companies no longer represented a valuation opportunity. Interestingly, communications services and consumer discretionary companies were the second and third best contributors, respectively, in 2018 but both maintained similar exposure in the Index.” wrote Brandon Rakszawski , Senior ETF Product Manager at VanEck.
Related: 2018 Volatility in Markets & the ETF Industry
Near the end of 2018, MOAT’s allocation was able to blunt the effects of the volatility roiling the markets, allowing for less losses compared to the S&P 500. Thus far in 2019, however, one notable observation was a move back to tech.
Last week, the tech sector got a boost when Apple bested analyst expectations in earnings and revenue for its fiscal first quarter, muting previous warnings by CEO Tim Cook that results would disappoint due to lackluster iPhone sales.
“The most notable shift in the portfolio was the increase in information technology exposure. The U.S. Moat Index weighting of roughly 20% to information technology is now back to market weight relative to the S&P 500. Information technology was a significant underweight for most of 2018,” wrote Rakszawski.
The Morningstar Economic Moat Rating methodology assigns an economic moat rating to companies, but in addition, it focuses on companies exhibiting attractive valuations relative to its price. Furthermore, the indexing methodology uses five sources of economic moats:
- Intangible assets with brand recognition for premium pricing options
- Switching costs that make it too expensive to stop using a company’s products
- Network effect that occurs when the value of a company’s service increases as more use the service
- A cost advantage helps companies undercut competitors on pricing while earning similar margins
- Efficient scale associated with a competitive advantage in a niche market
The moat strategy itself “offers global exposure to Morningstar’s best ideas, which are really rooted in their equity research process of identifying quality companies – those companies with economic moats as Warren Buffett coined that term, but also identifying their attractiveness in terms of valuations, so making sure you’re not overpaying for those quality companies,” Rakszawsk told ETF Trends.
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