By Brandon Rakszawski
Senior ETF Product Manager
Van Eck Associates Corporation

Summary

The Morningstar Wide Moat Focus Index’s style exposure and stock selection were key to its resilience through January’s market turmoil.

The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) began 2022 with a notable display of the resiliency it has historically exhibited through periods of market turmoil. The Index finished January well ahead of the S&P 500 Index, with defensive characteristics on display. The Moat Index posted a loss of -2.27% for the month, almost half of the S&P 500’s loss of -5.17%. Some of the Index’s outperformance can be attributed to its style exposure, notably its underweight to growth and overweight to value. However, stock selection proved beneficial in January, particularly from several companies that contributed to the Moat Index’s 2021 underperformance.

January Moat Index Standouts

Wells Fargo & Co. (WFC)

The Moat Index is currently underweight financials, which detracted from relative performance as financials performed well compared to other sectors in January. Its stock selection within the financials sectors offset the effects of its underweight. Wells Fargo was one standout in the Index, as it outpaced financials and the banking industry broadly speaking.

The bank reported solid fourth quarter results well ahead of consensus expectations, driven in large part by higher-than-expected net interest income and fee income. Morningstar notes that Wells Fargo remains in the middle of a multiyear rebuild with years of expense savings-related projects ahead of it, but that it has seen glimpses of the bank’s transition to offense from defense.

Morningstar raised Wells Fargo’s fair value estimate to $62 per share from $55 on January 18 to account for flat statutory tax rate expectations and three anticipated interest rate hikes in 2022.

Cheniere Energy Inc. (LNG)

Natural resources companies have generally benefited both from the reopening of the global economy over the last year and rising commodity prices. Materials and energy exposure are typically light in the Moat Index due to a general lack of wide moat rated companies from the sector. Cheniere Energy has been one of the few index constituents from either sector in recent years and has contributed positively as of late.

According to Morningstar, Cheniere benefits from the intangible assets moat source derived primarily from the 20-year take-or-pay contracts that it has signed with multiple customers to liquefy natural gas. This has put Cheniere in an incredibly strong competitive position as a pure toll-taker with no commodity price risk.

Morningstar believes Cheniere is well-positioned to be the exporter of the incremental liquefied natural gas supplied to the global market over the next few years, particularly as demand ramps up from China. However, they must also address regulatory reforms in Europe that will scrutinize the environmental impacts of U.S. liquefied natural gas producers to avoid losing exposure to the continent, which is a major source of liquefied natural gas demand.

History of Moat Index’s Defensive Characteristics

By nature of investing in companies with competitive advantages that are also attractively priced, the Moat Index has historically offered attractive risk and return characteristics through market downturns. From its live inception in February 2007, the Index has provided attractive relative returns paired with impressive drawdown performance.

Index Risk Statistics

2/2007 – 12/2021

Annualized
Return
Annualized
Standard
Deviation
Sharpe
Ratio
Max
Drawdown
Upside
Capture
Downside
Capture
Moat Index13.8118.510.76-35.10106.9585.60
S&P 500 Index10.8016.980.65-45.80100.00100.00

Source: Morningstar.com Calculated using quarterly returns.

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. 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.

Note on a Moat Stock: Meta Platforms

Meta Platforms (the company formerly known as Facebook) reported quarterly results after the close of markets on February 2, sending shares into a free fall the following day. According to Morningstar, revenue was slightly ahead of expectations, but the firm missed on the bottom line due to higher investments in not only the Reality Labs metaverse segment but also in Reels and in overall improvement of its advertising back-end. Its first quarter 2022 revenue guidance was also below consensus estimates.

Morningstar reduced its fair value estimate for Meta slightly from $404 per share to $400, but stated that they don’t think the market’s reaction is warranted and believe wide-moat Meta’s shares now present an attractive investment opportunity.

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.

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Originally published by VanEck on February 10, 2022. 

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Important Disclosures

Source for all data unless otherwise noted: Morningstar.

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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/moat/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.

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. Standard Deviation is a historical measure of the variability of returns relative to the average annual return. A higher number indicates higher overall volatility. Sharpe Ratio is a risk-adjusted measure that is calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance. Max Drawdown measures the largest loss from peak to trough in a certain time period. Upside Capture measures whether an index outperformed a calculation benchmark index in periods of market strength. A ratio over 100 indicates an index has generally outperformed the calculation benchmark index during periods of positive returns for the calculation benchmark index. Downside Capture measures whether an index outperformed a calculation benchmark index in periods of market weakness. A ratio of less than 100 indicates that an index has lost less than its calculation benchmark index in periods of negative returns for the calculation benchmark index.

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 and bears no liability with respect to that ETF 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® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.

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.

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.

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 © 2021 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.spdji.com. 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.

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