SMID-Cap Moat Companies Shine in March
23 April 2024
Read Time 6 MIN
The 2024 market rally continued in March with the S&P 500 gaining over 3% during the month and finishing the quarter up over 10%. This marks the fifth positive month in a row for the S&P 500 and its strongest first-quarter result since 2019. The market’s move up was supported by strong economic data and confidence that rate cuts, despite a delay in timing and reduced magnitude, are still on the horizon. Divergence in the Magnificent 7 continued this month with only two, NVIDIA and Alphabet, of the seven names outperforming the market. In a positive sign for market breadth, it was previously less favored areas of the market like energy, materials, and utilities that led in March.
The Morningstar Wide Moat Focus Index (the “Moat Index”) had a strong month outperforming the S&P 5001. Driving this outperformance were overweight allocations to the materials and industrial sectors as well as positive stock selection during the month. For the full quarter, the Moat Index lagged the market due to its structural underweight to the Magnificent 7; however, continued broadening out of the market could prove to be tailwind for the Index going forward.
Companies on the smaller end of the market cap spectrum outperformed large-caps this month, with mid-caps outpacing the S&P 500 by over 200 basis points. Small-caps performed more in line with the broad market and continue to be notable laggards versus both mid- and large-caps year to date. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) benefited from its mid-cap exposure, outperforming both the large- and small-caps benchmarks, but lagging some versus pure mid-caps.
Moat Stocks Outperformed in March | As of 31/03/2024
Source: Morningstar. As of 31/03/2024. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Moat Index Quarterly Review Highlights
Both the Moat and SMID Moat Indexes underwent quarterly reviews on March 15, 20242. Each quarter they systematically target the most attractively priced, high quality US companies within their respective universes. Below are a few takeaways from the reviews and how the indexes are now positioned.
Value and Defensive Positioning Maintained
At the March review, the Moat Index continued its move away from richly priced growth and technology names, instead favoring more defensive and value-oriented sectors of the market. This is a trend we have seen play out gradually over the last few quarterly reviews since early 2023, when the Moat Index leaned into technology given their extreme declines in valuations from a down year in 2022. Exposure to consumer staples and health care increased this quarter, while technology now sits at a 15% underweight relative to the S&P 500.
| Moat Index Style Exposure | Current Exposure | Rebalance Change | Relative to S&P 500 Index |
| Value | 34.5% | +3.6% | +12.1% |
| Core | 45.3% | -2.3% | +5.4% |
| Growth | 20.2% | -1.3% | -17.5% |
Source: Morningstar. As of 15/03/2024. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Attractive Valuation in Moat Stocks
The weighted average price-to-fair value of the Moat Index fell to 0.85 following the March review, signaling a 15% discount to Morningstar’s fair value estimate. This is in contrast to the price/fair value ratio of the S&P 500 Index, which sat at 1.03, as of the same date. This suggests that the companies in the S&P 500 are, in aggregate, 3% overvalued according to Morningstar.
SMID Moat Index Highlights
Utilities Favored, Not Regional Banks
This quarter, the SMID Moat Index saw the addition of several electric companies, resulting in utilities seeing the largest increase in exposure from a sector perspective and moving from an underweight to a slight overweight relative to the Russell 2500 Index. Attractive valuations were the driving force of this move, with five electric companies added in total, including Entergy (ETR), FirstEnergy (FE) and Edison International (EIX), among others.
On the other end, financials and consumer discretionary were the sectors with the largest decreases in exposure this quarter. Within financials, it was regional banks accounting for the largest underweight from an industry perspective. Relative to the Russell 2500, the SMID Moat Index is underweight regional banks by nearly 5% following the March review. It’s possible we see a reversal of this trend, as many of these banks are excluded due to negative momentum rather than pure valuation. As a reminder, the SMID Moat Index incorporates a momentum filter as a means to help mitigate risk by reducing exposure to “falling knives”, or stocks with low valuations but poor momentum, which may weigh on returns and add to near-term volatility.
Valuation Opportunity within SMID Moats?
The weighted average price-to-fair value of the SMID Moat Index fell from 0.85 to 0.82 following the March review, signaling an 18% discount to Morningstar’s fair value estimate3. The broad-based Russell 2500 Index featured a weighted average price-to-fair value ratio of 1.06 as of the same date.
Choose Your Moat Strategy
VanEck’s suite of moat investing strategies is powered by Morningstar’s equity research team, which seeks quality companies trading at attractive valuations. The below ETFs offer access to US moat companies
VanEck Morningstar US Wide Moat UCITS ETF (MOTU) : companies with a wide moat rating, which means Morningstar believes the company is likely to sustain its competitive advantage for at least the next 20 years.
VanEck Morningstar US SMID Moat UCITS ETF (SMOT) small and mid-cap moat companies.
VanEck Morningstar US Sustainable Wide Moat UCITS ETF (MOAT) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Sustainability Moat Focus Index.
VanEck Morningstar Global Wide Moat UCITS ETF (GOAT) seeks to track as closely as possible, before fees and expenses, the price and yield performance of the Morningstar Global Wide Moat Focus Index.
The value of the securities held by a Moat ETF may fall suddenly and unpredictably due to general market and economic conditions in markets in which issuers or securities held by the funds are active. Investors should read the prospectus and other relevant documents before making the decision to invest.
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1 Please refer to the more comprehensive performance chart above.
2 Please refer to the more comprehensive performance chart above.
3 Please refer to the more comprehensive performance chart above.
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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.
VanEck Asset Management B.V., the management company of VanEck Morningstar US SMID 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.
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.
VanEck Asset Management B.V., the management company of VanEck Morningstar Global Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law and 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 for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions.
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions. This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811), who is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited and its 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 can be obtained free of charge at www.vaneck.com, from the local information agent Computershare Investor Services PLC or from the Management Company.
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.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck Securities UK Limited
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