The Morningstar Wide Moat Focus Index outperformed the S&P 500 Index in 2022 as of the end of August despite recent stock market volatility, driven by sector allocations and stock selection.
August was a volatile month for stocks, as investors attempted to digest the renewed hawkish tone coming from the U.S. Federal Reserve (Fed). Fed Chair Jerome Powell addressed inflation challenges at the Jackson Hole conference with language reminiscent of former chair Paul Volcker. Powell iterated that higher rates for longer may be needed to bring inflation under control, despite greater recession risk. He even went as far as acknowledging that central bank policy may cause "some pain" to the U.S. economy in the near term. Major U.S. market indexes, which were initially up through the first half of August, crashed following these comments to end the month in negative territory.
The Morningstar® Wide Moat Focus IndexSM (the "Moat Index" or "Index") remains ahead of the S&P 500 index by 4% in 2022 (-12.1% vs. -16.1%, respectively), as of 8/31/2022. This is despite lagging the S&P 500 in August (-4.8% vs. -4.1%, respectively). The Moat Index's outperformance so far this year has been driven by a combination of positive sector allocation and strong stock selection, particularly within the Consumer Staples and Healthcare sectors. However, for the month of August, it was selection effect within technology that drove underperformance relative to the S&P 500.
|Top 5 Moat Index Contributors in August|
|Company||Ticker||Average Weight (%)||Return Contribution (%)|
|Gilead Sciences Inc.||GILD||2.75||0.17|
|Compass Minerals International||CMP||0.94||0.08|
|Meta Platforms Inc.||META||2.15||0.05|
|Charles Schwab Corp.||SCHW||1.41||0.04|
|Bottom 5 Moat Index Contributors in August|
|Company||Ticker||Average Weight (%)||Return Contribution (%)|
|Veeva Systems Inc.||VEEV||3.22||-0.35|
|The Western Union Co.||WU||2.69||-0.35|
Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein. For a complete list of holdings in the ETF, please visit www.vaneck.com.
Gilead Sciences Inc. (GILD)1
Gilead Sciences is a drug manufacturer that develops and markets therapies to treat life-threatening infectious diseases, with the core of its portfolio focused on HIV and hepatitis B and C. Acquisitions over the last few years have helped broadened this focus to also include pulmonary and cardiovascular diseases and cancer. Morningstar attributes Gilead's wide moat rating to its strong patent protection and expertise in infectious diseases and single-pill formulations. GILD was the top contributor to performance for the Moat Index in August following strong second-quarter earnings and increased sales guidance for the remainder of the year on strong HIV and oncology sales.
GILD's share price gained over 6% in August to end the month just over $63 per share, while Morningstar currently estimates Gilead's fair value to be $81.
3M Company (MMM)2
The well-known large multinational conglomerate, with over 60,000 products in a variety of markets, was among the bottom contributors to performance for the Moat Index this month. 3M's stock price was pressured following updated news on current product litigation the company is facing regarding liability suits alleging faulty earplugs. Morningstar believes the fears surrounding 3M's litigations are responsible for the share's current price discount to their estimate of fair value. However, despite the current legal troubles, there was no significant impact on Morningstar's fair value estimate for 3M Company. Morningstar believes the company can still provide positive economic benefits based on its suite of innovative products and its wide economic moats centered on intangible assets and cost advantage.
3M Company's share price declined 12% in August to end the month at around $125 per share, while Morningstar estimates MMM's fair value to be $183.
1 2.85% of the Moat Index as of 8/31/2022.
2 2.35% of the Moat Index as of 8/31/2022.
Source for all data unless otherwise noted: Morningstar.
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.
Morningstar Ratings: When applicable, ratings shown when the ETF is rated three stars or more for any given period. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics.
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.
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.
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. Past performance is no guarantee of future results.
The Morningstar moat-driven indexes represent various regional exposures and consist of 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.
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 S&P Dow Jones Indices. 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.
An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in equity securities, consumer discretionary, consumer staples, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges, and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck ETFs carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
This article was written by