For the past five years, technology has been the best-performing sector in the S&P 500, and thanks to the likes of Google parent Alphabet (NASDAQ:GOOG) and Facebook parent Meta Platforms (NASDAQ:META), communications services enjoyed plenty of upside as well.
As investors well know, those high-growth sectors are sagging this year due in large part to rising interest rates, and while plenty of companies from those sectors qualify as wide moat stocks, exchange traded funds such as the VanEck Vectors Morningstar Wide Moat ETF (MOAT) don’t necessarily need tech to lead anew to generate upside for investors.
Indeed, there’s no denying the $6.6 billion MOAT had a 30.90% allocation to tech stocks as of the end of October, but some of the ETF’s other sector positions could be drivers of a potential resurgence by the fund.
“In fact, recent weeks have already been showing hints of a change of leadership. With the exception of the big post-inflation report rally, so-called Big Tech stocks have been continuing to post losses and warning of tough earnings ahead,” according to Morningstar. “Instead, winners have tended to be slower-growth, cash-generating companies, such as financials and healthcare companies.”
The financial services sector may not offer the thrill rides often found in the communication services and tech sectors, and the same is true of healthcare when stripping out biotech and medical devices. However, favorable cash flow-generating and volatility traits are in style in the current market environment. Fortunately, MOAT devotes almost 27% of its lineup to healthcare and financial services equities.
Those are positive attributes at a time when the timeline for a tech rebound isn’t immediately clear and as value stocks are outperforming growth rivals. Additionally, the cash flow-generating capabilities of MOAT components, both tech names and otherwise, are critical in a rising rates environment. Translation: MOAT remains a pertinent consideration, with the Federal Reserve not overtly saying exactly when it will dial back the pace of rate hikes.
“With the exception of the big growth-stock rally that followed the better-than-expected October Consumer Price Index report, the winners in the market reflect a change in leadership from even the summer bounce, which was led by technology and other stocks,” added Morningstar. “Since the end of September, the market’s gains were paced by value stocks from the financial services, industrials, energy, and healthcare sectors.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
