Home etftrends.com Moat Investing: Is the Party Over for Big Tech?

Moat Investing: Is the Party Over for Big Tech?

By Coulter Regal, CFA
Associate Product Manager

Big tech has been a key driver of broad market returns over the last decade, becoming large weights in major indices. This concentration risk may now spell trouble.

Continuing the theme of volatility that has persisted so far this year, U.S. equity markets rebounded sharply in October off the lows set last month in one of the worst Septembers in recent history. The major indices were all up for the month with the Dow Jones Industrial leading the pack, up 14%, as it saw its largest monthly gain since 1976. The S&P 500 was up roughly 8%, while the tech heavy Nasdaq lagged during the month, posting a more pedestrian return of about 4%. All three major indices remain in the red by double digits year-to-date as of 10/31/2022.

The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) remains ahead of the S&P 500 index by a little more than 2% in 2022 (-15.5% vs. -17.7%, respectively), as of 10/31/2022. This is despite lagging the S&P 500 in October (6.8% vs. 8.1%, respectively). The Moat Index’s outperformance so far this year has been driven by a combination of positive sector allocation and strong stock selection, particularly within the Consumer Staples and Healthcare sectors. However, for the month of October, it was selection effect within technology that contributed the most to underperformance relative to the S&P 500.

Is the Party over for Big Tech?

Over the last decade, big technology stocks—particularly the revered FANMAG stocks (Meta Platforms/Facebook, Amazon, Netflix, Microsoft, Apple and Google/Alphabet)—have been responsible for a significant portion of broad market returns. They have also grown to become outsized portions of the major market indices that are often the foundation of many investor portfolios. Today, the FANMAG stocks make up nearly 20% of the S&P 500. Now with the prospect of higher rates for longer and a possible recession on the horizon, that concentration risk could spell trouble, as cracks in big tech have begun to appear, revealing that they are no longer sure-fire bets.

CompanyTicker1 Month Return6 Month ReturnYTD Return
Meta Platforms IncMETA-31.34-53.53-72.30
Amazon.comAMZN-9.35-17.57-38.55
Netflix IncNFLX23.9753.33-51.55
Microsoft CorpMSFT-0.33-15.97-30.52
Apple IncAAPL10.96-2.46-13.29
Alphabet IncGOOG-3.09-20.31-34.86

Source: Morningstar. 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.

The Moat Index has historically been underweight FANMAG names, given its equal weighting methodology and lack of wide moat ratings for Apple and Netflix. Despite this underweight to some of the market’s top performers, the Moat Index has outperformed the S&P 500 by over 250 basis points annually since its inception in February 2007. Today, FANMAG exposure in the Moat Index sits at about 8%, setting up the strategy to potentially benefit on a relative basis versus the broad market if weakness in big tech names continues.

Wide Moat Stock Highlights

Emerson Electric Co. (EMR)1

Emerson Electric (EMR), a multi-industrial conglomerate that operates under the two business platforms of automation solutions and commercial and residential solutions, was a top contributor to performance for the Moat Index in October. EMR’s commercial and residential solutions business boasts several household brands, including Copeland and RIDGID. Their automation solutions side is most known for its process manufacturing solutions, which consists of measurement instrumentation, as well as valves and actuators, among other products and services. Morningstar views Emerson Electric as the undisputed powerhouse in process manufacturing on the west side of the Atlantic. Morningstar assigns Emerson Electric a wide economic moat rating, based primarily on switching costs, and secondarily on intangible assets. Despite headwinds in fiscal 2020 given low levels of gross fixed investment amid geopolitical uncertainty and COVID-19-related disruptions, Morningstar believes Emerson is poised for several years of positive organic growth after a slow recovery in early 2021.

Emerson Electric’s share price gained over 18% in October to end the month just over $86 per share, while Morningstar currently estimates EMR’s fair value to be $113.

Meta Platforms (META)2

Meta, the largest social network in the world with nearly 3 billion monthly active users, was the bottom contributor to performance for the Moat Index in October. Meta’s share price was punished following its mixed third-quarter results and guidance for continued operating expense growth in the coming year. Investor concern is mainly regarding the firm’s metaverse strategy, in which the firm plans to continue investing significantly more than many had projected, without much clarity about when any return on this investment could be realized. However, on the positive side, Morningstar notes that Meta’s recent results indicate that their wide moat rating, stemming from network effect, remains intact given the firm’s encouraging user count and engagement metrics. Morningstar believes this positions Meta to accelerate revenue growth in late 2023, with the assumption that macro uncertainty eases.

Meta’s share price declined 30% in October to end the month around $95 per share, while Morningstar estimates Meta Platform’s fair value to be $260.

VanEck Morningstar Wide Moat 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.

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Originally published by VanEck on 9 November 2022.

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Important Disclosures

1 2.72% of the Moat Index as of 10/31/2022.

2 1.45% of the Moat Index as of 10/31/2022.

Source for all data unless otherwise noted: Morningstar.

Definitions: The S&P 500 is a stock market index of 500 of the largest companies listed on stock exchanges in the United States. The Nasdaq Composite Index is a stock market index that consists of the stocks that are listed on the Nasdaq stock exchange. The Dow Jones Industrial is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indices.

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.

Morningstar Ratings: When applicable, ratings shown when the ETF is rated three stars or more for any given period. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics.

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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. 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/.

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 was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark 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 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 © 2021 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 https://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, investing in equity securities, consumer discretionary, consumer staples, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, 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 concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

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