Moat Investing: The Value Tilt in Context
April 07, 2021
Jenna Dagenhart: Joining us to share more about how moat strategies work, and the transition to value is VanEck's Senior ETF Product Manager, Brandon Rakszawski. Brandon, how does a moat strategy fit into the portfolio, and how has this strategy performed compared to the broader market?
Brandon Rakszawski: Our VanEck Vectors Morningstar Wide Moat ETF fits really in the core of an equity allocation within a portfolio. It tends to be a large blend strategy, and it historically has been. It's a very unique strategy, but also very simple when you look under the hood. It's simple in the sense that the underlying index that MOAT (the ticker symbol for the ETF) is seeking to track seeks to identify companies with sustainable competitive advantages, but also seeks to identify those that are trading at attractive prices relative to their fair value.
Brandon Rakszawski: So, very simple. Find great companies with competitive advantages, and identify those that are attractively priced and allocate to them on a quarterly basis. Where it's unique within the marketplace is that the underlying index is leveraging Morningstar equity research’s 100-person plus analyst team and their output—their economic moat ratings and their fair value assessment—in order to assemble a portfolio of wide moat companies that are trading at an attractive valuation.
Brandon Rakszawski: Whereas most index-based strategies in the ETF marketplace may be using quantitative, backward-looking data to assemble a differentiated index, with the hopes of outperforming in the future, this strategy is leveraging forward-looking equity research by an extensive global equity research team with a proven track record. The underlying index and the ETF have performed very well, historically, relative to the broad U.S. equity markets as represented by an index like the S&P 500 over the five-year period, ending on March 31. And the ETF itself has outperformed the S&P 500 Index by nearly 3.5%.
Brandon Rakszawski: And in the near term, in the first quarter of 2021, the ETF and the underlying index nearly doubled the performance of the S&P 500 index—just under 12% for the ETF and index, where the S&P was just over 6%. So, it's off to a strong start this year, and a lot of that has to do with the positioning of the portfolio that we've seen over the last year or so.
Jenna Dagenhart: Yeah, let's talk a little bit more about your positioning. The moat strategy is not a traditional value strategy, yet you have a large exposure to value. Could you walk us through your process, some of the holdings in this transition to value?
Brandon Rakszawski: That's right. The underlying index certainly doesn't have a mandate. It's not a value strategy. It's not a growth strategy. It will simply identify opportunities based on valuations within the broader, wide moat universe. In 2020, as markets sold off amidst the pandemic turmoil, we did see the portfolio start to shift more and more toward value stocks. We saw financial companies, like Bank of America and others that have not been in the index for quite some time, start to enter, based on valuation opportunities. And Boeing would be another example. So, whereas the index may have had a growth bias in the past, currently it has a value tilt, and we believe it's positioned well for future success.
Jenna Dagenhart: Finally, Brandon, I won't ask you to predict the future here, but would love to get a sense of where you see this strategy headed from here? Anything interesting in the pipeline?
Brandon Rakszawski: Yeah, so as I mentioned, the quarterly reviews take place on a systematic schedule. That just occurred toward the end of March, and we didn't see a drastic pullback, from a style perspective, in value type of exposures. Whereas some of the strongest performing companies in the index started to lose that appeal from a valuation perspective and were removed from the portfolio—such as financials, or some of the large banks that were in the portfolio—the index is still positioned with a modest tilt toward value.
Brandon Rakszawski: So, we think that that's pretty well positioned moving forward, as we've seen a resurgence from cyclical stocks on the heels of hopeful economic recovery, leaving this pandemic shutdown environment. We'll see where it goes from here, but we're hopeful that the portfolio remains positioned to benefit from any future economic activity.
Jenna Dagenhart: Well, Brandon, great to have you. Thank you so much for joining us.
Brandon Rakszawski: You're welcome.
Jenna Dagenhart: And thank you for watching. That was VanEck's Senior ETF Product Manager, Brandon Rakszawski. To receive regular updates for VanEck's experts, please visit vaneck.com/subscribe. I'm Jenna Dagenhart with Asset TV.
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