Precious little worked in equity markets in 2022, but the quality factor was less bad than just tapping basic broad market strategies.
For example, as of December 28, the S&P 500 Quality Index is outpacing the basic S&P 500 by 250 basis points this year while displaying slightly lower annualized volatility than the parent index. Different approaches to quality are performing even better. Just look at the VanEck Morningstar Wide Moat ETF (MOAT), which is topping the S&P 500 by 420 basis points.
MOAT follows the Morningstar Wide Moat Focus Index, and that gauge’s methodology, in part, explains why the ETF proved less bad this year. In simple terms, MOAT’s index attempts to identify wide moat stocks trading at attractive multiples. One way of looking at that combination is its quality-meets-value strategy — a pertinent approach because both factors beat the broader market in 2022.
Those are also among the reasons why coverage of wide moat strategies, including MOAT, was among the most popular on VettaFi’s Beyond Basic Beta Channel in 2022. Enhancing the MOAT case with 2023 looming is the established track record of outperformance by wide moat stocks over extended holding periods.
“Stocks that earn Morningstar’s wide moat designation with strong competitive advantages that should help them outperform their peers over the next 20-plus years—have fared worse this year than the overall market,” said Morningstar analyst Lauren Solberg.
Adding to MOAT’s potential potency in 2023 is that some of its holdings, across a variety of sectors, are attractively valued while bolstering wide moat credentials. That group includes BlackRock (NYSE:BLK), the world’s largest asset manager.
“BlackRock has carved out a wide moat due to its scale, its ability to offer both active and passive products, its greater focus on institutional investors, strong brands, and reasonable fees,” noted Morningstar sector strategist Greggory Warren.
Healthcare is another important sector in the MOAT conversation. In part, that’s due to exposure to medical device giants such as Medtronic (NYSE:MDT) and Zimmer Biomet Holdings (NYSE:ZBH). Among their various wide moat traits, medical device companies sport high switching costs, meaning it’s expensive, in dollar and time terms, for clients to switch to rival products.
“Medical devices, for their part, have high switching costs because surgeons develop expertise in using a differentiated set of tools and device systems have component parts that are designed to work together,” wrote Morningstar analyst Ben Slupecki.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.
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.