Moat Investing: Strong Performance Across the Board

Despite another 75 basis point rate hike by the Federal Reserve, U.S. equity markets continued their recovery in November off the back of positive macro data released early in the month indicating that inflation may finally be starting to cool. Federal Reserve Chairman Jerome Powell then followed up later in the month with an upbeat and positive tone noting that smaller interest rate increases were likely ahead. The better-than-expected CPI data and more dovish Fed posturing fueled the market’s hopes that peak inflation was now behind us and that the end to the rate hiking cycle was not far off, giving stocks a considerable boost.

The Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) returned 8.77% in November, leading the S&P 500 index by a little more than 300 basis points during the month (8.77% versus 5.59%, respectively). For the year, the Moat Index remains ahead of the S&P 500 by over 500 basis points year-to-date (-8.05% vs. -13.10%, respectively) as of 11/30/2022.

Outperformance for the Moat Index throughout 2022 is attributable to both strong stock selection and favorable sector allocations relative to the S&P 500. However, in November, it was almost entirely stock selection driving the positive alpha, with overweight’s in Etsy Inc. (ETSY), Boeing Co. (BA), and Lam Research Co. (LRCX) as top contributors to performance for the month.

Moat Strategies Outperform Across the Board

With more than 15 years of live performance history, the flagship Moat Index’s strong performance is well documented and often the primary topic of these monthly posts. However, many may overlook, or simply be unaware of, the recent stretch of success posted by Morningstar’s other moat-driven indexes, each focusing on a distinct area of the equity market.

Source: Morningstar as of 11/30/22. 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.

The Morningstar^® US Small-Mid Cap Moat Focus Index^SM (the “SMID Moat Index”) is the newest of the suite but was built using the same time-tested approach of the other moat indexes: target moat-rated companies with attractive valuations. The SMID Moat Index was launched in July of 2022 and focuses on moat-rated valuation opportunities, specifically within the small- and mid-cap U.S. equity universe. The Index has impressed since its recent launch, most recently outperforming its broad market benchmark, the Russell 2500 Index, by nearly 400 basis points in November. Given the noteworthy valuation discounts currently seen in small- and mid-cap companies, the SMID Moat Index may be well positioned if the U.S. economic backdrop continues to improve.

In terms of the international equity markets, the Morningstar^® Global ex-US Moat Focus Index^SM (the “International Moat Index”) and the Morningstar^® Global Wide Moat Focus Index^SM (the “Global Moat Index”), which each apply the Moat investing philosophy to opportunities abroad, have both also performed well in 2022 posting sizeable outperformance versus their respective broad market benchmarks during the year. Performance for both the International and Global Moat Indices were exceptionally strong in November (14.98% and 9.03%, respectively) given the weakening in the U.S. Dollar that occurred, which could continue to provide a supportive tailwind into next year if the trend persists.

While ESG strategies have generally underperformed this year due to less exposure to the carbon-intensive energy sector, the Moat Suite’s ESG index, the Morningstar^® US Sustainability Moat Focus Index^SM (the “ESG Moat Index”), which targets the same attractively priced U.S. companies with long-term competitive advantages as the flagship Moat Index, but also applies screens for ESG risks, has still managed to outperform its board market benchmark so far in 2022. Environmental and ethically responsible investing has been a major theme recently and will no doubt continue to be a matter of increasing importance to investors. VanEck’s Morningstar ESG Moat ETF (MOTE) seeks to replicate the ESG Moat Index and can provide a solution to investors who are seeking a sustainable approach to moat investing.

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Originally published on 7 December 2022. 

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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.  This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.  Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.  Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.  Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck. 

Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

All investing is subject to risk, including the possible loss of the money you invest.  As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.  Diversification does not ensure a profit or protect against a loss in a declining market.  Past performance is no guarantee of future performance.