Moat Stocks Maintain Lead Through Turbulence
March 09, 2023
Read Time 5 MIN
After a strong January, where benchmark U.S. stock indices had their best starts to a year in recent memory, investors were decidedly less cheery in February. Equities retreated during the month amid signs that inflation is declining less quickly than anticipated, tight labor markets are not easing and consumer spending has remained robust. All of these factors are helping to maintain price pressures and leading to concerns that we may not be as close to a U.S. Federal Reserve pivot as some initially thought.
The flagship Morningstar Wide Moat Focus Index (the “Moat Index”) and its more nascent small- and mid-cap focused counterpart, the Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”), did not escape the market volatility. Both the Moat and SMID Moat Indices were down in February (-2.72% and -3.27%, respectively), slightly lagging the broader benchmarks during the month. However, despite the turbulence, both Moat Indices maintained their year-to-date lead over the various market cap segments of the U.S. stock market.
Moat Stocks Remain Ahead for the Year
Year-to-Date Total Return as of 2/28/2023
Source: Morningstar. As of 2/28/2023. Past performance is no guarantee of future results. Index performance is not illustrative of Fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333. Indexes are unmanaged and are not securities in which an investment can be made.
Meta Shines in a Turbulent Month
In the face of a volatile and mostly down market environment, there were still several bright spots within the Moat Index during the month. Most notable is Meta Platforms (META), which was the Moat Index’s top contributor in February. META shares soared over 17% in February, following a positive earnings release that saw better than expected revenue and the appearance of a renewed focus on primary business lines instead of CEO Mark Zuckerberg’s metaverse future. Other top contributors include cybersecurity corporation Fortinet (FTNT) and software/chip company Nvidia Corp. (NVDA). On the reverse side, detractors to Moat Index February performance landed primarily within the Industrials, Consumer Discretionary and Materials sectors.
Top Contributors and Detractors from Moat Index - February 2023
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Meta Platforms Inc. | META | Communication Services | 3.05 | 0.45 |
| Fortinet Inc. | FTNT | Technology | 2.51 | 0.31 |
| Nvidia Corp. | NVDA | Technology | 1.79 | 0.30 |
| Monolithic Power Systems Inc. | MPWR | Technology | 1.49 | 0.18 |
| MercadoLibre Inc. | MELI | Consumer Discretionary | 2.86 | 0.10 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| International Flavors & Fragrances Inc. | IFF | Materials | 2.10 | -0.40 |
| Adobe Inc. | ADBE | Technology | 2.59 | -0.33 |
| Etsy Inc. | ETSY | Consumer Discretionary | 2.58 | -0.31 |
| Equifax Inc. | EFX | Industrials | 2.52 | -0.23 |
| TransUnion | TRU | Industrials | 2.47 | -0.23 |
Source: Morningstar, February 2023. 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.
Moat Stock Highlight: AI Craze Drives Nvidia
Nvidia Corp. (NVDA)1 is the top designer of discrete graphics processing units (GPUs) used in a variety of end markets, including PC gaming, data centers and the now extremely fast-growing artificial intelligence (AI) market. It was the top performing stock in the Moat Index for February. Nvidia’s wide economic moat stems from its intangible assets related to the design of its GPUs. NVDA has captured the lion’s share of the GPU market, which has significant barriers to entry in the form of advanced intellectual property, making it unlikely that rivals will be able to compete. Additionally, Nvidia has a large research and development budget relative to AMD and smaller GPU suppliers, which allows it to continuously innovate and fuel a virtuous cycle for its high-margin chips.
NVDA was up during the month following higher quarterly revenues than expected and the recent explosion of popularity in AI models, like OpenAI’s ChatGPT, or Google’s newly launched competitor, Bard. Artificial intelligence represents one of the biggest growth opportunities for the semiconductor industry, and many believe Nvidia is in a prime position to grow from it.
NVDA’s share price gained over 18% in February to end the month at about $230 per share, which now puts the stock above Morningstar’s estimate of fair value of $200. NVDA had traded at a 20% discount as recently as December of last year.
Small-Caps Hold Their Ground
With small- and mid-cap (SMID-cap) stock valuations at multi-decade lows compared to large-caps and shifting market dynamics, we believe SMID-caps may deliver on this historic return premium over large caps in 2023. In the SMID-cap U.S. equity segment in February, stocks fared in line with or slightly better relative to large-caps. Small-caps, demonstrated by the Russell 2000 Index, actually held up better in the down market this month than both mid-caps and large-caps. This is despite the higher levels of volatility that is generally expected in smaller companies.
Within the SMID Moat Index, top contributors for February include the power management solutions company Monolithic Power Systems (MPWR), the global supply chain solutions provider WESCO International (WCC) and BorgWarner Inc. (BWA), an automotive manufacturer and supplier. Sectors that detracted the most from SMID Moat Index performance during the month were Health Care, Communication Services and Materials.
Top Contributors and Detractors from SMID Moat Index - February 2023
| Leading Contributors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Monolithic Power Systems Inc. | MPWR | Technology | 1.47 | 0.17 |
| WESCO International Inc. | WCC | Industrials | 1.50 | 0.16 |
| BorgWarner Inc. | BWA | Consumer Discretionary | 1.49 | 0.10 |
| Omnicom Group Inc. | OMC | Communication Services | 1.54 | 0.08 |
| Manhattan Associates Inc. | MANH | Technology | 0.74 | 0.07 |
| Leading Detractors | ||||
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Sirius XM Holdings Inc. | SIRI | Communication Services | 0.93 | -0.27 |
| International Flavors & Fragrances Inc. | IFF | Materials | 1.12 | -0.21 |
| LivaNova PLC | LIVN | Healthcare | 1.19 | -0.19 |
| Warner Music Group Corp. | WMG | Communication Services | 1.38 | -0.19 |
| ICU Medical Inc. | ICUI | Healthcare | 1.39 | -0.17 |
Source: Morningstar, February 2023. 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 Stock Highlight: Monolithic Power
One of the few stocks that is currently found in both the Moat and SMID Indices is Monolithic Power Systems Inc. (MPWR)2. As a reminder, the Moat Index is technically an all-cap strategy; however, it tends to bias towards large-caps due to its mandate to target only wide moat companies. MPWR is an analog and mixed-signal chipmaker, specializing in power management solutions. The firm’s mission is to reduce total energy consumption in end systems, and it serves the computing, automotive, industrial, communications and consumer end markets. MPWR uses a fabless manufacturing model, partnering with third-party chip foundries to host its proprietary process technology.
Morningstar believes Monolithic Power Systems is a disruptor in the power management chip market, using its proprietary process technology to differentiate from larger competitors. MPWR boasts a wide economic moat, as a result of intangible assets from its innovative chip designs and advancements in manufacturing as well as switching costs for its integrated power management chips.
Monolithic Power Systems was a top performer in both Moat and SMID Moat Indices as its share price gained nearly 14% in February to end the month at about $485 per share. Morningstar currently estimates MPWR’s fair value to be $562 per share.
Accessing Moat Stocks
VanEck Morningstar Wide ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.
VanEck Morningstar SMID Moat 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.
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Important Disclosures
1 1.96% of the Moat Index as of 2/28/2023.
2 1.54% of the Moat Index and 1.52% of the Moat Index as of 2/28/2023.
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.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
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/.
Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/smot/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 and Morningstar® US Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks 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 Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar's equity research team.
Russell 2500 Index represents small- and mid-cap US companies. Russell 2000 Index represents small-cap US companies. Russell Midcap Index provides investors with a benchmark for mid-sized US companies. 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 © 2023 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 www.spglobal.com/spdji/en/. 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, risks related to investing in equity securities, consumer discretionary sector, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, 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 index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and 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 the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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Important Disclosures
1 1.96% of the Moat Index as of 2/28/2023.
2 1.54% of the Moat Index and 1.52% of the Moat Index as of 2/28/2023.
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.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
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/.
Holdings will vary for the SMOT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/etf/equity/smot/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 and Morningstar® US Small-Mid Cap Moat Focus IndexSM were created and are maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF or the VanEck Morningstar SMID Moat ETF and bears no liability with respect to the ETFs or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM and Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks 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 Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
The Morningstar® US Small-Mid Cap Moat Focus IndexSM is intended to track the overall performance of small- and mid-cap companies with sustainable competitive advantages and attractive valuations according to Morningstar's equity research team.
Russell 2500 Index represents small- and mid-cap US companies. Russell 2000 Index represents small-cap US companies. Russell Midcap Index provides investors with a benchmark for mid-sized US companies. 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 © 2023 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 www.spglobal.com/spdji/en/. 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, risks related to investing in equity securities, consumer discretionary sector, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, 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 index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT®) may be subject to risks which include, among others, risks related to investing in equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and 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 the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.