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.
| Company | Ticker | 1 Month Return | 6 Month Return | YTD Return |
| Meta Platforms Inc | META | -31.34 | -53.53 | -72.30 |
| Amazon.com | AMZN | -9.35 | -17.57 | -38.55 |
| Netflix Inc | NFLX | 23.97 | 53.33 | -51.55 |
| Microsoft Corp | MSFT | -0.33 | -15.97 | -30.52 |
| Apple Inc | AAPL | 10.96 | -2.46 | -13.29 |
| Alphabet Inc | GOOG | -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.
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