By Brandon Rakszawski
Director of Product Management
Investors Back at the International Equity Table
For much of the last fifteen years, many U.S. investors have largely ignored equity investment opportunities outside of the U.S., gravitating to their home country bias through U.S.-focused equity funds. This trend is understandable. The MSCI ACWI ex-USA Index has lagged the S&P 500 Index by over 7% annually for the last 15 years through February 2023 (2.31% vs. 9.76%, respectively).
This year, signs of a reversal are apparent. Investors removed $28.8 billion from U.S.-focused equity mutual funds and ETFs through the first two months of 2023 while international-focused equity funds welcomed $16.8B of new investment, according to Morningstar. With many risks in the market, whether this trend will persist remains to be seen, but multiple forces are positive for international companies: a weakening dollar and expectations for a sideways and volatile U.S. equity market for the foreseeable future, among others.
Through March 22, 2023, the MSCI ACWI ex-USA Index has posted a slightly better year-to-date return than the S&P 500 Index (3.62% vs. 2.96%, respective). With more investors looking outside of the U.S. in this period of uncertainty, a more selective approach may be prudent.
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Reversal of Fortunes for International Companies
As of 2/28/2023
Source: Morningstar. Past performance is no guarantee of future results. Indexes are unmanaged and are not securities in which an investment can be made.
Quality International Companies for any Market
There has been a focus on quality companies across the board as investors have navigated inflation, rate hikes, and now a banking crisis. But there is little consensus on what makes for a quality company. For more than 20 years, Morningstar has honed their framework to identify those highly-desirable companies that have built competitive advantages that can last. Moat-rated companies can tend to survive fads in the market, new competitive pressure and are often better suited to weather market stress.
Looking outside the U.S., the Morningstar Global ex-US Moat Focus Index (“International Moat Index”) has separated itself from the international markets in recent periods. It reflects the ethos of Morningstar’s broader moat investing philosophy: invest in quality moat-rated companies that are also trading at attractive prices. This approach has yielded impressive results.
International Moat Index vs. International Market
As of 3/22/2023
Source: Morningstar. 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.
Dollar Reversal Benefitted International Companies
One catalyst driving international stock performance has been the reversal of the U.S. dollar. After its peak on September 27, 2022, international stocks have outpaced U.S. stocks and the International Moat Index has impressed to the upside.
International Moats Outpacing U.S. and Broad International Stocks
Source: Morningstar. 9/27/2023 – 3/22/2023. 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.
Differentiated International Exposure
The International Moat Index’s exposure is often quite differentiated from broad international equity market indexes. This is driven by two factors: Morningstar’s equity research coverage universe and its index selection methodology.
In order to qualify for the International Moat Index, a company must be covered by Morningstar’s equity research team. While its coverage has evolved and Morningstar has increased research capabilities over time, there are several structural overweights and underweights driven by this coverage. For example, Japan is relatively under covered by Morningstar, reducing the number of eligible companies from Japan.
Equally as influential is the International Moat Index’s selection methodology, which is driven in large part by valuations. The index will select attractively priced companies each quarter on a pre-determined schedule, which drives much of the shifts in the index each quarter. The result of the March 2023 index review can be viewed here.
International Moat Index: Relative Regional Exposure
As of 3/22/2023
International Moat Index: Relative Sector Exposure
As of 3/22/2023
Source: Morningstar. For illustrative purposes only. Relative weights reflects the difference between the International Moat Index weight and MSCI ACWI ex-USA Index.
VanEck Morningstar International Moat ETF (MOTI) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar® Global ex-US Moat Focus IndexSM.
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Originally published 29 March 2023.
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This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
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The Fund may become “non-diversified” as defined under the Investment Company Act of 1940, as amended, solely as a result of a change in relative market capitalization or index weighting of one or more constituents of the Morningstar® Global ex-US Moat Focus IndexSM. This means that the Fund may invest a greater percentage of its assets in a limited number of issuers than would be the case if the Fund were always managed as a diversified management investment company. The Fund intends to be diversified in approximately the same proportion as the Morningstar® Global ex-US Moat Focus IndexSM. Shareholder approval will not be sought when the Fund crosses from diversified to non-diversified status due solely to a change in the relative market capitalization or index weighting of one or more constituents of the Morningstar® Global ex-US Moat Focus IndexSM.
The Morningstar® Global ex-US Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar International Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Global ex-US Moat Focus IndexSM is a service mark of Morningstar, Inc.
An investment in the Fund may be subject to risks which include, among others, risks related to investing in equity securities, communication services sector, consumer discretionary sector, financials sector, information technology sector, health care sector, medium-capitalization companies, foreign securities, foreign currency, emerging market issuers, special risk considerations of investing in Asian, Chinese, European and United Kingdom issuers, depositary receipts, cash transactions, market, operational, high portfolio turnover, 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 index-related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated risks.
The MSCI ACWI (All Country World Index) ex USA Index captures large and mid-cap representation across 22 of 23 developed markets countries (excluding the U.S.) and 24 emerging markets countries.
The MSCI ACWI ex USA Value Index captures value oriented large and mid-cap representation across 22 of 23 developed markets countries (excluding the U.S.) and 24 emerging markets countries.
The MSCI ACWI ex USA Growth Index captures growth oriented large and mid-cap representation across 22 of 23 developed markets countries (excluding the U.S.) and 24 emerging markets countries.
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