Bloated Index Returns No Match for MOAT

20 February 2024

Read Time 2 MIN

In a calendar year dominated by the “Magnificent 7,” the Morningstar Wide Moat Focus Index not only kept pace with the broader market, it outperformed.

Strong 2023 Results Enhanced Long-Term Outperformance

For equity markets, 2023 was the year of the “Magnificent 7.” As of 31 December 2023, these 7 mega-cap stocks accounted for 22.52% of the broad-based Morningstar US Market Index. And in 2023, they were responsible for more than 50% of the index’s total calendar year return.

	Weight %				Contribution %
Company	Index	Benchmark	+/-	Total Return %	Index	Benchmark	Active Return %
Apple Inc		6.22	-6.22	49.00		2.58	-1.21
Microsoft Corp	1.98	5.65	-3.67	58.19	1.23	2.83	-0.88
Alphabet Inc	2.59	3.17	-0.58	58.58	1.36	1.58	-0.14
Amazon.com Inc	1.94	2.60	-0.66	80.88	1.50	1.67	-0.08
NVIDIA Corp	0.40	2.12	-1.71	239.02	1.21	2.36	-0.85
Tesla Inc		1.42	-1.42	101.72		0.92	-0.67
Meta Platforms Inc	2.04	1.36	0.68	194.13	3.25	1.43	-1.89
Total	8.95	22.52	-13.57		8.55	13.37	-1.95
2023 Total Return %:					32.41	26.43
% of 2023 Total Return From "Magnificent 7":					26.38	50.59

Source: Morningstar, as of December 2023. Data Time Period: 1/1/2023 to 31/12/2023. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.

However, these 7 mega-cap stocks only represent an 8.95% weighting in the Morningstar Wide Moat Focus Index (as of 31 December 2023). Yet, despite the performance headwind of nearly 2% from this 13.57% underweight to the Magnificent 7, the Morningstar Wide Moat Focus Index (the Moat Index) posted strong absolute returns in 2023 and handily outperformed the Morningstar US Market Index by 5.97% in 2023.

The Moat Index employs an equally-weighted index methodology which makes it’s 2023 success even more impressive. In a year dominated by mega cap stocks, equal-weighted indexes generally lagged their market capitalization-weighted equivalent. Despite this second headwind, the Moat Index’s process shined.

Index Name	Trailing 1-Year	Trailing 3-Year	Trailing 5-Year	Trailing 10-Year	Live Inception
Morningstar Wide Moat Focus Index	32.41	12.84	17.53	13.48	12.68
Morningstar US Market Index	26.43	8.62	15.25	11.60	9.41
+/-	5.97	4.22	2.28	1.88	3.27

Index Name	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
Morningstar Wide Moat Focus Index	-5.39	-19.58	46.93	8.57	6.61	24.50	31.46	9.68	-4.28	22.37	23.79	-0.74	35.65	15.09	24.81	-13.08	32.41
Morningstar US Market Index	2.47	-37.03	28.45	16.80	1.58	16.27	33.13	12.85	0.69	12.44	21.47	-5.05	31.22	20.90	25.78	-19.43	26.43
+/-	-7.85	17.46	18.48	-8.23	5.03	8.24	-1.68	-3.17	-4.97	9.93	2.32	4.31	4.43	-5.81	-0.98	6.35	5.97

Source: Morningstar, December 2023. Data Time Period: 14/02/2007 – 31/12/2023. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.

Longer term, the Moat Index’s focus on identifying companies with wide economic moat ratings has paid off. The Morningstar Wide Moat Focus Index has now outperformed the Morningstar US Market Indexover six of the last eight years. Equally as impressive, the Moat Index has outperformed the Morningstar US Market Index in 66% of the 12-month rolling periods since it’s 2007 inception.

The Morningstar equity research team recently conducted a detailed analysis of the Wide Moat Focus Index’s 2023 performance and positioning. In addition to the performance breakdown outlined above, highlights of this analysis include:

Attribution analysis: Both sector positioning and stock selection proved favorable in 2023.
Valuation analysis: Despite recent outperformance, the index continues to offer an attractive discount to fair value.
Sector positioning: Sector weightings drifted toward a more defensive posture in 2023.
Style & market cap analysis: The index migrated toward a value style bias and smaller on the market cap spectrum.
Holdings highlights: Meta Platforms, Salesforce and MarketAxess stood out as strong performers in 2023.

It is worth mentioning that each investor might have a different personal return on investment. The timing of the entry point in investments has consequential effects on overall portfolio performance. Entering the market at an opportune time can result in favorable outcomes, such as capitalizing on potential market upswings and maximizing returns. Conversely, mistimed entries may expose investors to increased volatility and potential financial losses. Market conditions, economic indicators, and asset-specific factors all contribute to the consequences of the entry point. Investors who carefully consider these variables and make well-timed decisions are better positioned to navigate the complexities of the financial markets and enhance the long-term stability of their investment portfolios. Understanding the consequences of timing in investments is crucial for risk management and achieving desired financial outcomes.

Investment value fluctuates constantly and it is worth looking back at historical drawdowns to understand more the risk consequences of your decisions. The maximum drawdown of the Morningstar Wide Moat Focus Index for the period from March 2007 to January 2024 is 42.4%. Please remember that investing in equities is risky.

Visit the VanEck Morningstar US Wide Moat UCITS ETF overview page to learn more about MOTU.

Important Disclosures

VanEck Asset Management B.V., the management company of VanEck Morningstar US Wide Moat UCITS ETF (the "ETF"), a sub-fund 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:

UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
Germany - Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
France - Facility Agent: VanEck (Europe) GmbH
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH

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
Germany - Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
France - Facility Agent: VanEck (Europe) GmbH
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH

Morningstar® US Sustainability Moat Focus Index is a trade mark of Morningstar Inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Sustainable Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in VanEck Morningstar US Sustainable Wide Moat UCITS ETF.
Effective December 17, 2021 the Morningstar® Wide Moat Focus IndexTM has been replaced with the Morningstar® US Sustainability Moat Focus Index.
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.
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.

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