Charting the Moat Index’s Long-Term Track Record

August was a volatile month for U.S. equity markets. The S&P 500 Index finished the month in negative territory for the first time since February 2023. Several market forces impacted companies during the month. Fitch downgraded the U.S. government’s long-term credit rating from AAA to AA+; the U.S. Department of Labor released data reinforcing the perception of a robust labor market, which could potentially allow the Fed to more easily prolong their tightening policy; and corporate earnings continue to come in lower than prior quarters, although not quite as low as predicted. These and other factors led to increased uncertainty in the equity markets in August.

The Morningstar Wide Moat Focus Index (the “Moat Index”) trailed the S&P 500 by 2% in August (-3.59% vs. -1.59%, respectively). This sizable underperformance month is generally uncharacteristic, as the Moat Index has only trailed the S&P 500 by more than 2% in five of the last 60 months. As is typically the case, the underperformance was driven by stock selection rather than sector overweights or underweights. Despite the difficult month, the Moat Index remains more than 500 basis points ahead of the S&P 500 for the year with a 23.90% return through August versus the S&P 500’s return of 18.73%.

Looking to smaller-cap companies, the market returns were more negative in August for smaller companies. Mid cap stocks, as represented by the S&P MidCap 400 Index (-2.89%) and the S&P SmallCap 600 Index (-4.14%) both finished increasingly more in the red. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”), like the Moat Index, struggled relatively in August with a return of -4.16%. Because there is some overlap in the two moat indexes, many of the same companies were key contributors to negative performance.

More to the Moat Story than One Month

No investors want to see their strategy underperform a broad market benchmark. But, despite all of the success the Moat Index has had over its more than 15-year history, it has only outperformed the S&P 500 in any given calendar month 50% of the time. Stated differently, the Moat Index has outperformed the S&P 500 by 3.25% annually since its February 14, 2007 launch but has underperformed the S&P 500 Index in nearly half of the months along the way.

The key with this long-term, core strategy is Morningstar’s forward-looking perspective in selecting quality companies. Looking beyond the coin toss that is one-month success allows you to see the Moat Index’s clear long-term history of outperformance over long holding periods, increasing to a staggering 100% success rate, or batting average, over all 79 of the Moat Index’s 10-year rolling periods since its 2007 inception.

Consistent Long-Term Relative Performance

3/2007 – 8/31/2023

Source: Morningstar, July 2023. 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. Batting Average is measured by dividing the number of periods a portfolio or investment strategy outperforms a benchmark by the total number of periods.

Moat Stock Selection Drives Performance

As is customary, the prospects of the Moat Index were once again driven largely by stock selection as opposed to an overweight (or underweight) to any particular sector. A handful of names were outsized contributors to negative absolute returns in August, several from the consumer discretionary sector.

Etsy (ETSY)

Etsy struggled mightily in August compared to the rest of the market. It’s -27% return for the month placed it squarely at the bottom within the Moat Index. The title of Morningstar’s latest equity research report tells it all: Etsy’s Near-Term Prospects Soft, but Platform Investments Should Bear Fruit as Macro Pressure Eases. Etsy has faced significant headwinds since entering the Moat Index, but Morningstar stands by its wide moat rating and recognition of Etsy’s unique network effect. Its fair value estimate was lowered from $151 per share to $145 in late August to reflect an increase in both cost of capital assumptions and long-term tax rate.

Polaris (PII)

Polaris finished August trading at a 33% discount to Morningstar’s fair value estimate. That was despite a slight decrease from $175 per share to $171 in late July to incorporate the company’s second-quarter results into Morningstar’s model. The 70-year-old recreational vehicle power house continues to benefit from its powerful intangible assets, robust R&D budget, and low-cost production, according to Morningstar.

Top contributors in August included automation equipment and services company Emerson Electric (EMR), biopharma firm Amgen (AMGN) and Comcast Corp. (CMCSA).

Top Contributors and Detractors from Moat Index – August 2023

Source: Morningstar, August 2023. 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.

Data as of 9/5/2023. These are not recommendations to buy or sell any security. Security holdings may vary.

Smaller Caps Bear Brunt of Pull Back

Smaller-cap companies underperformed their larger cap peers on the downside in August. Mid-cap stocks performed worse than large caps and small-cap companies performed even worse. Because moat-rated companies tend to be larger, more established companies, the SMID Moat Index tends to feature a mid-cap bias relative to other SMID-cap indexes. Because of this and the Moat Index’s unconstrained approach, there can be some overlap between the two indexes. In August, several overlapping companies happened to be some of the key drivers of underperformance. The SMID Moat Index also held Etsy (ETSY), Polaris (PII) and Zimmer Biomet (ZBH).

August top contributors included financial market intelligence company Broadridge Financial Solutions (BR), Global Payments Inc. (GPN) and cloud software company Splunk (SPLK).

Top Contributors and Detractors from SMID Moat Index – August 2023

Source: Morningstar, August 2023. 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.

Data as of 9/5/2023. These are not recommendations to buy or sell any security. Security holdings may vary.

Accessing Moat Stocks

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.

VanEck Morningstar SMID Moat ETF (SMOT) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Small-Mid Cap Moat Focus Index.

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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 mentioned herein. 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. 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 employees.

Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: MOAT – VanEck Morningstar Wide Moat ETF – Holdings

Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: SMOT – VanEck Morningstar SMID Moat ETF – 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 Index^SM and Morningstar^® US Small-Mid Cap Moat Focus Index^SM 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 Index^SM and Morningstar^® US Small-Mid Cap Moat Focus Index^SM 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 Index^SM 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 Index^SM 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 Index^SM 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; 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 © 2023 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, consumer discretionary sector, 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, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount 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.

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