By Brandon Rakszawski, Director of Product Management
The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) underwent its quarterly review on December 15, 2023. The Index’s review process systematically targets attractively priced, high quality U.S. companies. Below are some key takeaways from the December review and how the Moat Index is positioned as we enter 2024. The full review results are available here: 4Q2023 Index Reconstitution.
Key Takeaways:
- You Already Own a Ton of the Magnificent 7; The Moat Index Doesn’t
The S&P 500 Index, widely owned by investors of all types by way of index funds, was also reconstituted and rebalanced last week. The result: more Magnificent 7 exposure. The “magnificent” seven companies that have dominated U.S. market returns in 2023 now account for the top eight holdings in the S&P 500 Index and approximately 28% of its weight (Alphabet (both share classes), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). The Moat Index represents only 4.9% by way of Alphabet, Amazon, and Microsoft. In fact, the Moat Index has been consistently underweight these seven companies – even more impressive considering the Index’s stellar track record vs. the Magnificent 7-dominated S&P 500 Index.
- Value Bias with a Slight Smaller Cap Tilt
The Moat Index started the year with an overweight position in the tech sector following a particularly difficult 2022 for tech and growth stocks in general. Throughout 2023, the Index has migrated away from growth toward value stocks as valuations have signaled green pastures away from tech in more defensive sectors such as industrials, health care, and financials. Those trends continued with a modest shift further from tech and growth last week. The Index’s size profile is about as small as it has been in the last ten years. The equal weighting of the Moat Index introduces a structure market cap bias away from mega cap companies, but valuations have also pushed the Index slightly lower in the large cap segment throughout 2023.
- Identifying Pockets of Opportunity
The price/fair value ratio of the S&P 500 Index currently sits at 1.0. This implies that the companies in the S&P 500 are, overall, fairly valued according to Morningstar. This presents a challenge for investors with cash positions seeking an opportunity to invest in U.S. markets that have appreciated by more than 20% already this year. The Moat Index represents high quality companies currently mispriced by the market, in Morningstar’s view. It allows investors to consider a mix of well-positioned companies with upside potential. Currently, the Morningstar price/fair value ratio of the Moat Index is 0.83 implying a 17% discount to fair value.
4Q2023 Index Review Results
Moat Index Sector Shifts
Moat Index Sector Exposure Relative to S&P 500 Index
Moat Index Style Exposure Relative to S&P 500 Index
Source: Morningstar. As of 12/15/2023 unless otherwise noted.
Access Quality Companies and Attractive Valuations
VanEck Morningstar Wide Moat ETF (MOAT) and VanEck Morningstar Wide Moat Fund seek to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.
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Originally published 20 December 2023.
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Important Disclosures
Source for all data unless otherwise noted: Morningstar.
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 mentioned is 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: MOAT – VanEck Morningstar Wide Moat ETF – Holdings.
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.
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 or VanEck Morningstar Wide Moat Fund and bears no liability with respect to the funds 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 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.
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