2016: A Strong Year For Moats

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For the Year Ending December 31, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") finished the year well ahead of the S&P 500® Index (22.37% vs. 11.96%). Several companies in the U.S. Moat Index stood out in 2016 to boost performance. Internationally, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") rebounded in the fourth quarter to outpace the MSCI All Country World Index ex USA for the period (5.77% vs. 4.50%).

U.S. Domestic Moats: Persistent Outperformance

Strong stock selection benefited the U.S. Moat Index in 2016 and led to its strongest calendar year of outperformance compared to the S&P 500 Index since 2009. The performance gap first began to widen in February and then increased throughout the remainder of the year. Merger and acquisition (M&A) activity played a major role in the performance of several constituents. The acquisition of LinkedIn Corp. (LNKD +73.26) by Microsoft Corp. (MSFT) provided a catalyst which made LinkedIn the strongest performing constituent stock during its inclusion in the Index. Furthering the M&A theme, St. Jude Medical, Inc. (STJ 41.05%) was also a standout while in the Index due to an acquisition announced by Abbott Laboratories (ABT). Additionally, Time Warner, Inc. (TWX +52.24%) benefited while in the Index from the announced AT&T (T) merger.

Several firms performed well on their own merits while in the U.S. Moat Index in 2016. Spectra Energy Corp (SE +31.94%) was a standout early in the year before exiting in the Index as the only energy sector constituent for 2016. All told, strong performance was driven primarily by the information technology, consumer discretionary, industrials, and financials sectors. By contrast, no single sector detracted from Index performance in 2016.

Although positives outweighed negatives, the U.S. Moat Index did not end the year unscathed. Despite a strong rebound following the U.S. elections, several biotech firms were unable to erase losses from earlier in the year and ended the period in the red while in the Index: Biogen, Inc. (BIIB), Gilead Sciences, Inc. (GILD), and Allergan plc (AGN).

International Moats: Fourth Quarter Bounce Back

The International Moat Index struggled throughout the first half of the year relative to the broad international stock market, particularly following the Brexit vote in June. Exposure to British firms such as Lloyds Banking Group (LYG -22.88%) were a drag on the portfolio. Much of that changed following the U.S. elections as global financial firms rallied amid expectations for a more accommodating regulatory environment in the U.S. Financials finished the year as the second largest contributor to International Moat Index performance, trailing only the consumer discretionary sector.

Gaming companies were very strong performers from the consumer discretionary sector. MGM China Holdings Ltd (OTCPK:MCHVY +45.20%) was the top performing stock in the Index in 2016, and others such as Sands China Ltd. (OTCPK:SCHYF +8.90%) and Genting Singapore plc (OTCPK:GIGNY SP, +8.44%) performed well for the year. Other consumer discretionary names also posted notable performance while in the Index, such as, luxury brand company Kering SA (OTCPK:PPRUY +42.61%) and car maker BMW (OTCPK:BMWYY +20.35%).

The real estate, healthcare, and consumer staples sectors were the three sectors which detracted from International Moat Index performance for the year. While Canadian, French, and Australian firms provided the top performing country exposure, China exposure though Hong Kong-traded real estate firms and auto maker Dongfeng Motor Group (OTCPK:DNFGY -26.90%) were among the top detractors for the year.

Monthly Index Returns

1 Year Index Returns

Top/Bottom Index Performers

Index Reconstruction

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