The latest Morningstar Wide Moat Focus Index quarterly rebalance saw a further reduction in FAANG stocks exposure and the addition of several highly recognisable consumer brands.
The Morningstar® Wide Moat Focus IndexTM (the “Index”) which the VanEck Vectors Morningstar Wide Moat ETF (MOAT) tracks was rebalanced effective 19 June 2020.

What is out? FAANGs

Impressive performance resulted in unattractive relative valuations for Amazon (AMZN) and Facebook (FB). Both companies’ index weight was cut in half following strong returns year to date.

FAANG stocks have received more than their share of investor and media attention in recent years as they have, at times, contributed to an outsized portion of the broad US stock markets’ returns. The Index has naturally been underweight these stocks relative to most broad US market indexes. Morningstar equity research analysts have assigned Apple (AAPL) and Netflix (NFLX) a narrow moat rating, leaving both ineligible for inclusion in the wide moat-only Index. Google, or Alphabet, Inc. (GOOGL), was included in the Index as recently as December 2019, but was removed as the company became too pricey relative to other eligible wide moat companies. 

Communications services and information technology are currently a combined 13% underweight relative to the S&P 500 Index due to the Wide Moat stocks that make up those sectors are considered over-valued by Morningstar.

Relative Sectors Weights

As of 19/6/2020

Sector Morningstar Wide
Moat Focus Index
S&P 500 Index Relative Weight
Communication Services 5.5% 10.9% -5.6%
Consumer Discretionary 8.8% 10.7% -2.4%
Consumer Staples 8.0% 7.0% +4.2%
Energy 5.0% 2.9% -0.2%
Financials 15.1% 10.5% +6.9%
Health Care 18.8% 14.6% +3.4%
Industrials 11.9% 8.0% +3.7%
Information Technology 20.8% 26.9% -7.4%
Materials 4.8% 2.5% +2.2%
Utilities 1.3% 3.0% -1.8%
Real Estate 0.0% 2.8% -2.8%

Source: Morningstar.

What is in? Consumer Brands

Several highly recognised consumer brand companies were added to the Index this quarter. These companies are consumer reliant, global, and have been impacted by the COVID-19 induced economic slowdown..

  • Coca-Cola (KO): Coca-Cola entered the Index for the first time since 2014. The beverage company has long benefited from its strong brand (intangible assets) and cost advantages and is currently trading at a 15% discount to fair value at 23 June 2020, according to Morningstar. Morningstar’s equity research team sees long-term value in Coca-Cola shares despite limited near-term visibility on potential COVID-19 impact on revenue.
  • Tiffany & Co. (TIF): Tiffany has a classic intangible asset source of economic moat, allowing it to charge more for a piece of jewelry because of its historic brand and iconic blue box. Despite this strong wide economic moat, the company has only been in the Index for three quarters since its launch in 2007, all in 2016. According to Morningstar, 95% of the jeweler’s brick and mortar locations in the Americas and Japan and 85% in Europe were closed at the end of its latest reporting quarter. However, 85% of Asia-Pacific stores have been partially or fully reopened. As of 23 June, 2020, Tiffany was trading slightly below fair value as it works toward the completion of its acquisition by LVMH, the premium of which is reflected in Morningstar’s current US$135 fair value estimate.
  • Yum! Brands (YUM): Yum’s last and only time in the index was for two quarters in 2017. Another company that is facing COVID-19 related pressure, Yum was trading at a 14% discount to fair value on 23 June, 2020 despite a reduction to its fair value estimate from US$110 to US$102 per share in mid-March. Morningstar believes Yum is well-positioned to survive, and even thrive, following the COVID-driven downturn. “We see near-term pressures as temporary and believe Yum is well-positioned to compete for market share ceded by smaller independent restaurant closures following coronavirus-related disruptions,” noted Morningstar consumer strategist R.J. Hottovy in a 15 June, 2020 analyst note.

Published: 29 June 2020

All returns in Australian dollars unless otherwise indicated.

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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.