Why Did the Moat Index Increase Its IT Exposure?


Feb. 13 2019, Updated 2:25 p.m. ET


The most notable shift in the portfolio was the increase in information technology exposure. The U.S. Moat Index weighting of roughly 20% to information technology is now back to market weight relative to the S&P 500. Information technology was significant underweight for most of 2018.

Clearly, valuation opportunities among wide moat companies changed as the year came to an end. The strategy locked in gains in several positions, exited some laggards, and allocated to several new companies with potential upside in the eyes of Morningstar equity analysts.

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Increased exposure to the tech sector

The IT sector was the most underweighted sector in the Morningstar Wide Moat Index last year. The sector reported a loss of 3.08% in 2018. The Morningstar Wide Moat Index also added its exposure to the financials and industrials sector, which reported a loss of 14.6% and 14.8%, respectively, in 2018.

Among the added stocks from the IT sector, Applied Materials (AMAT) carries a wide moat rating by Morningstar. Despite a slight slowdown in Applied Materials’ fourth-quarter results, Morningstar thinks that a rise in capital intensity for semiconductor manufacturing is intact. Morningstar held onto the wide rating for Applied Materials. KLA-Tencor (KLAC) carries a moat rating because of its competitive advantage. The company has leading technical expertise and an extensive knowledge base in the semiconductor equipment industry.

The other added stocks from the tech sector were Intel (INTC), Blackbaud (BLKB), and Facebook (FB). The above chart shows these stocks’ return on invested capital for 2017 and 2018.

Morningstar helps investors by identifying companies with a competitive edge and assigns them an economic moat rating. To get exposure to the stocks with a wide moat, investors could consider the VanEck Vectors Morningstar Wide Moat ETF (MOAT), which tracks the Morningstar Wide Moat Index.

Since every investment carries some risk, investors should be cautious before making any investment decisions.


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