Khanchit Khirisutchalual
The Morningstar US Small-Mid Cap Moat Focus Index, which applies Morningstar’s moat investing philosophy to smaller-cap companies, delivered impressive results to end 2022.
The challenge many investors face with small- and mid-cap (SMID-cap) investing is that this segment of the market tends to be less efficient. There are far more SMID-cap companies than large-cap companies and significantly less research available on them. That is one of the driving forces behind our excitement with the launch of the VanEck Morningstar SMID Moat ETF (SMOT) last October.
Many of our clients that have invested in the VanEck Morningstar Wide Moat ETF (MOAT), which offers large blend U.S. equity exposure, had expressed interest in applying Morningstar’s moat investing philosophy to smaller market cap companies. And we believe there is a strong case for considering SMID-cap companies now. Valuations relative to large-cap companies are quite attractive on a long-term basis and there has been a return premium offered historically by smaller companies relative to large companies. This premium hasn’t been there the last decade, but in light of recent market events, we may very well see that dynamic return to historical norms.
Early Days, But Strong Start for the SMID Moat Index
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 IndexSM (the “SMID Moat Index”). The Index 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. Stated differently, SMOT investors may benefit from Morningstar’s rigorous research process applied to SMID-cap companies, which may be a potentially better alternative to beta indexes or other unproven investment managers.
The SMID Moat Index was formally launched by Morningstar in July 2022. While new, its construction methodology is based largely on the proven track record of the Morningstar® Wide Moat Focus IndexSM, which serves as the benchmark index for MOAT. The same attributes derived from Morningstar’s equity research team—economic moat ratings and fair value estimates—are considered in the construction of the SMID Moat Index.
The SMID Moat Index has historically favored mid-cap companies over small-cap companies, given the tendency for moat-rated companies to be more established, larger companies. With that being said, the SMID Moat Index delivered impressive results to end last year relative to both small- and mid-cap stocks in isolation, as well as a market cap-weighted basket of SMID-cap stocks.
Leading the Pack: SMID Moat Index Has Strong Start
Total Return as of 12/31/2022
Source: Morningstar. As of 12/31/2022. 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. Past performance is no guarantee of future results. Indexes are unmanaged and are not securities in which an investment can be made.
Get to Know SMOT
Unlike MOAT, SMOT will hold some companies that are not common household names. Below are a sample of those companies with moat ratings that contributed the most to SMID Moat Index performance in the fourth quarter last year as well as those that detracted the most.
Top Contributors and Detractors from SMID Moat Index
Fourth Quarter 2022
| Leading Contributors | ||||
| Name | Ticker | Sector | Avg. Weight | Contribution (%) |
| Warner Music Group Corp. | WMG | Communication Services | 1.41 | 0.66 |
| Affiliated Managers Group Inc. | AMG | Financials | 1.44 | 0.55 |
| DuPont de Nemours Inc. | DD | Materials | 1.39 | 0.47 |
| Tapestry Inc. | TPR | Consumer Discretionary | 1.29 | 0.43 |
| Omnicom Group Inc. | OMC | Communication Services | 1.46 | 0.42 |
| Leading Detractors | ||||
| Name | Ticker | Sector | Avg. Weight | Contribution (%) |
| Zscaler Inc. | ZS | Information Technology | 0.67 | -0.25 |
| Datadog Inc. | DDOG | Information Technology | 1.20 | -0.24 |
| Ionis Pharmaceuticals Inc. | IONS | Health Care | 1.46 | -0.24 |
| Tripadvisor Inc. | TRIP | Communication Services | 0.64 | -0.13 |
| Equitrans Midstream Corp. | ETRN | Energy | 1.42 | -0.12 |
Source: Morningstar. As of 12/31/2022. Past performance is no guarantee of future results.
Positioning Entering 2023
The SMID Moat Index ended 2022 with a diverse sector representation. No single sector exceeded 20% of its exposure, with consumer discretionary and industrials companies topping the list. As mentioned previously, the SMID Moat Index favors slightly larger companies within the SMID universe. As of December 2022, small-cap stocks represented 23.2% of its exposure according to Morningstar.
Diverse Sector Exposure
SMID Moat Index as of 12/31/2022
Source: Morningstar. As of 12/31/2022.
Important Disclosures
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.
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 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® US Small-Mid Cap Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar SMID Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® US Small-Mid Cap Moat Focus IndexSM is a service mark of Morningstar, Inc.
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.
Russell 2500 Index represents small- and mid-cap US companies. Russell 2000 Index represents small-cap US companies. S&P MidCap 400 Index provides investors with a benchmark for mid-sized companies.
An investment in the VanEck Morningstar SMID Moat ETF (SMOT) may be subject to risks which include, among others, equity securities, small- and medium-capitalization companies, consumer discretionary sector, financials sector, health care sector, industrials sector, information technology sector, market, operational, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and concentration risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.
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.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund’s investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck ETFs carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment