Moat Index Adds Tech as Volatility Reveals Value>
The Morningstar ® Wide Moat Focus Index SM (the “Moat Index” or “Index”) underwent its quarterly review on March 21, 2025. The Index systematically targets attractively priced, high quality U.S. companies each quarter, as identified by Morningstar’s equity research analysts. Below are a few highlights from the latest review. The full results are available here:
Moat Index Review Takeaways:
- Volatility Brings Tech Opportunities to Surface
The Moat Index picked up several tech companies during the quarterly review as semiconductor and software companies (largely semiconductor-related software companies) found themselves in undervalued territory. Tech, which has been a significant underweight and headwind to relative Moat Index performance, may now present an opportunity. As markets sell off and become less efficient, that dynamic has historically offered the Moat Index’s systematic allocation process a chance to capitalize on companies unfairly punished by broader momentum in the market.
- Growth Exposure Increases, Value Remains Largest Overweight
Despite the pullback in U.S. equity markets, mega caps continue to dominate the S&P 500 Index’s makeup. The Moat Index’s contrarian nature has resulted in a value bias relative to the headline large cap index and allows investors to meaningfully participate in the U.S. equity market with the added benefit of portfolio diversification. The Index’s methodology also allows it to target attractive valuation opportunities regardless of a company’s “style.” This quarter, the Moat Index’s growth exposure increased slightly while its value exposure decreased.
- Semiconductor Innovation Propels Moat Index Newcomers
There were two companies that were added to the Moat Index for the first time in its over 17-year history. Morningstar believes that as long as the semiconductor industry exists and is innovating, these two companies will be a necessary part of that innovation and earn excess returns on invested capital:
Cadence Design Systems (CDNS): Cadence provides leading-edge electronic design automation tools and IP critical to the semiconductor chip design process. It benefits from switching costs and intangible assets and was upgraded to a wide moat rating from narrow in December 2024. It historically traded well above fair value until February of this year.
Synopsys (SNPS): Like Cadence, Synopsys specializes in electronic design automation software used by engineers in the chip design and build phases. SNPS benefits from switching costs and intangible assets. Its moat rating was also upgraded from narrow to wide in December 2024.
1Q 2025 Moat Index Review Results
Moat Index Sector Shifts Following 1Q 2025 Review
Moat Index Sector Exposure Relative to S&P 500 Index
Moat Index Style Exposure Relative to S&P 500 Index: Value Bias Persists
Source: Morningstar. As of 3/21/2025 unless otherwise noted.
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