Owing to the collapses of several banks and speculation that more could be on the way, the first quarter wasn’t exactly sanguine. In better news, stocks held up well despite challenges in the financial services sector.
Increased volatility in the January through March period also served as a reminder to investors that some attributes and strategies can keep market participants engaged with equities while helping them thrive during rocky periods. Wide moat stocks and exchange traded funds such as the VanEck Morningstar Wide Moat ETF (MOAT) are prime examples.
Year-to-date, MOAT is beating the S&P 500 by nearly 500 basis points. While MOAT’s outperformance of broader domestic equity gauges isn’t linear, the $7.6 billion ETF has often topped the S&P 500 in its roughly 11 years on the market.
Savvy investors will want to understand why MOAT is proving sturdy in a rough trading environment. Some of that answer comes by way of sector attribution, which is to say that MOAT benefited in the first quarter by not having a large allocation to bank stocks.
“The recent U.S. banking failures had only a limited impact on both the Moat and SMID Moat Indexes, as neither index had exposure to the failed banks. The Moat Index does however have exposure to two diversified national banks. Wells Fargo & Co. (WFC), which has long been an Index component, and U.S. Bancorp (USB), which saw its position in the Index increase this quarter due to attractive valuation,” wrote Coulter Regal, associate product manager at VanEck.
MOAT currently devotes 11.25% of its weight to the financial services sector — the ETF’s fourth-largest sector weight. However, the ETF’s exposure to that sector is by way of large-cap, higher-quality institutions unlikely to deliver a Silicon Valley Bank sequel.
Another MOAT benefit on display in the first quarter was the Morningstar® Wide Moat Focus Index — the ETF’s underlying index — capturing profits in some tech holdings and trimming exposure to that resurgent sector, which could be a plus if other groups contribute to market upside later this year.
“The Moat Index previously saw its tech exposure increase to the largest overweight in quite some time over the last few quarters of 2022. Exposure came primarily from chip and equipment companies and enterprise software companies,” concluded Regal. “With the rally that many of these companies experienced to begin the year, their valuations became too pricey, allowing the Index to lock in gains in a fairly short period of time. Technology exposure in the Moat Index is now closer to market weight.”
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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.
