Diversify with Moat Stocks Amid Mag 7 Divergence
15 March 2024
Read Time 7 MIN
U.S. equity markets pushed higher in February, as the S&P 500 climbed more than 5% during the month to break 5,000 for the first time ever. This extends its positive streak to four months in a row. A strong fourth-quarter earnings season and continued momentum in AI-related stocks were drivers of this performance. Notable this month though, was some divergence in performance within the mega-cap Magnificent 7. NVIDIA, Meta and Amazon continued their dominance, while Apple, Tesla, Microsoft, and Alphabet lagged the market. Could this be a sign that market leadership is starting to broaden out? This may create opportunities in segments of the market that have been overlooked, like value-oriented stocks, as well as small- and mid-caps.
The The Morningstar Wide Moat Focus Index (the “Moat Index”) also had a strong February, rising 4.26% during the month, but lagged the broader market by some1. The Moat Index’s equal weight methodology and focus on valuation leads to a general underweight in the mega-cap names that receive significant weight in the popular broad indexes. This underweight has been a headwind for the Index of late; however, despite this, the Moat Index still managed to outperform the S&P 500 by over 600 basis points in 2023 and has also outperformed in longer trailing periods as well. The moat strategy could be considered a great way to diversify the mega-cap exposure most investors have across their portfolio.
Smaller-cap companies bounced back during the month after falling in January following the significant rally seen during the last couple months of 2023. Signs of life in this segment of the market may be an additional clue that market breadth is improving and the mega-caps will no longer have to shoulder all the weight. The The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) returned 6.57% during the month, outperforming S&P 500 and both the pure small- and mid-cap benchmarks2.
U.S. Equities Rally in February | As of 29/02/2024
Materials and Industrials Lead the Moat Index in February
This month there was clear sector representation within the leading drivers to February performance of the Moat Index. The materials sector, with Coreva (CTVA) and Ecolab (ECL), and the industrials sector, with Masco (MAS) and Equifax (EFX) accounted for four of the top five contributors in the Index. However, it was Walt Disney (DIS) that was the top contributor, up over 16%, with CEO Bob Iger reporting a strong start to the year and announcements of partnerships with Epic Games and Taylor Swift as well as a forthcoming sports streaming platform.
Detractors from performance this month also exhibited some sector concentration. Health care names Biogen (BIIB), Gilead Sciences (GILD) and Medtronic (MDT) all landed in the detractors list within the Moat Index. Drug manufacturer Biogen was the top February detractor after falling 12% following its earnings release. Despite this, Morningstar still maintained their $303 fair value estimate for Biogen and views the company as undervalued.
Biogen Morningstar Analyst Comments | by Karen Anderson, CFA – 13 February 2024
We’re maintaining our $303 fair value estimate for Biogen after the firm reported 2023 results that were in line with our expectations and earnings guidance for 2024 that was ahead of our prior forecast, as contract manufacturing declines are poised to improve gross margins more than we had anticipated, and as the firm’s cost savings program develops further, allowing bottom-line growth in 2024. We think the market is likely disappointed by the slow launch of Alzheimer’s drug Leqembi as well as Biogen and Eisai’s decision to invest in a 30% U.S. Leqembi salesforce expansion. Biogen remains in transition as the firm’s portfolio of multiple sclerosis drugs comes under pressure from generic and branded competition, and as newer drugs are just starting to launch, but we think top-line growth will return in 2025. Overall, we continue to see Biogen’s newer products and innovative pipeline supporting a wide moat.
Top Contributors and Detractors from Moat Index - February 2024
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| The Walt Disney Co | DIS | Communication Services | 2.55 | 0.41 |
| Corteva Inc | CTVA | Materials | 2.23 | 0.40 |
| Masco Corp | MAS | Industrials | 2.68 | 0.39 |
| Ecolab Inc | ECL | Materials | 2.54 | 0.34 |
| Equifax Inc | EFX | Industrials | 2.74 | 0.33 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Biogen Inc | BIIB | Health Care | 2.37 | -0.28 |
| Comcast Corp | CMCSA | Communication Services | 2.53 | -0.20 |
| Gilead Sciences Inc | GILD | Health Care | 2.38 | -0.19 |
| International Flavors & Fragrances Inc | IFF | Materials | 2.63 | -0.17 |
| Medtronic | MDT | Health Care | 2.57 | -0.12 |
Source: Morningstar, February 2024. 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.
SMID Moat Index Top Contributors and Detractors
Small- and mid-cap stocks roared back this month and within the SMID Moat Index, it was consumer discretionary that lead the pack in terms of contributors. Tapestry Inc. (TPR), luxury goods company and owner of the Coach, Kate Spade, and Stuart Weitzman brands, among others, was the top contributor returning over 20% in February. Also representing consumer discretionary was fashion brand Ralph Lauren (RL) and online food order aggregator and delivery company DoorDash (DASH). Companies detracting from performance were from a variety of sectors, including industrial parts distributor WESCO International (WCC), pharmaceuticals company Ionis (IONS), and Boston Beer Co. (SAM).
Top Contributors and Detractors from SMID Moat Index - February 2024
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Tapestry Inc | TPR | Consumer Discretionary | 1.54 | 0.35 |
| Interactive Brokers Group | IBKR | Financials | 1.30 | 0.29 |
| DoorDash Inc | DASH | Consumer Discretionary | 1.49 | 0.29 |
| Ralph Lauren Corp | RL | Consumer Discretionary | 0.79 | 0.23 |
| Charles River Laboratories International Inc | CRL | Health Care | 1.33 | 0.23 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| WESCO International Inc | WCC | Industrials | 1.42 | -0.20 |
| Ionis Pharmaceuticals Inc | IONS | Health Care | 1.41 | -0.17 |
| Boston Beer Co Inc | SAM | Consumer Staples | 1.22 | -0.14 |
| Expedia Group Inc | EXPE | Consumer Discretionary | 1.55 | -0.12 |
| Fox Corp | FOXA | Communication Services | 1.34 | -0.10 |
Source: Morningstar, February 2024. 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.
Accessing Moat Stocks
VanEck Morningstar US Wide Moat UCITS ETF (MOTU) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index. Main Risk Factors: Equity market risk, limited diversification risk, foreign currency risk.
VanEck Morningstar US SMID Moat UCITS ETF (SMOT) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Small-Mid Cap Moat Focus Index. Main Risk Factors: Equity market risk, risk of investing in smaller companies.
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1 Past performance is not guarantee of future results.
2 Past performance is not guarantee of future results.
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VanEck Asset Management B.V., the management company of VanEck Morningstar US Wide Moat UCITS ETF and VanEck Morningstar US SMID Moat UCITS ETF (the "ETF"), sub-funds of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
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Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
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Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
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It is not possible to invest directly in an index.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
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