The Morningstar Wide Moat Focus Index, which draws on the economic moat ratings of Morningstar’s equity research team to evaluate and screen constituents, underwent a number of changes at its most recent quarterly reconstitution on March 20.
Some of these changes were driven by Morningstar’s view that AI will increasingly disrupt certain business models across the software industry. As there have been significant multiple contractions across Morningstar’s software coverage, this outlook is clearly shared by investors more broadly.
Adobe (ADBE), Salesforce (CRM) and Workday (WDAY), which were recently downgraded from wide economic moat ratings to narrow economic moat ratings, each had their index weighting reduced as a result. However, the index’s overall exposure to the software industry was effectively unchanged, as other software companies that have retained their wide economic moat ratings were added to the index. This includes Fair Isaac (FICO), Palo Alto Networks (PANW), and Datadog (DDOG).
Andrew Lane – Director of Equity Research, Index Strategies, Morningstar:
“The Morningstar Wide Moat Focus Index targets companies with wide economic moats and attractive valuations, as assessed by our equity research team. The rapidly expanding capabilities of agentic AI inspired the Morningstar equity research team to review our economic moat ratings for 132 companies under our coverage. For certain companies that were subject to economic moat rating downgrades, their observed financial performance has actually remained quite strong even as we anticipate future potential disruption. This reflects the benefits of a forward-looking assessment of ‘quality,’ in the form of our economic moat rating, in a transparent, rules-based index.”
Brandon Rakszawksi – VP, Director of Product Management, VanEck:
“Recent updates to the Morningstar Wide Moat Focus Index and VanEck Morningstar Wide Moat ETF demonstrate the importance of bottom-up, fundamental research to long-term investors. In a volatile and dynamic market environment like today, where disruptive forces like artificial intelligence are rapidly reshaping the investor opportunity set, it is important to have a long-term focus to move to where the market is going, not just a static view of where it has been.”
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