Warren Buffett is widely regarded as one of the greatest
investors of all-time, and for good reason. The 'Oracle of Omaha'
has built up the one time struggling textile manufacturer of
Berkshire Hathaway (
BRK.A
)
into a global behemoth with investments in a variety of
industries and sectors.
Buffett's incredible track record is best demonstrated by the
rise of Berkshire Hathaway's stock price over the years; the
security was trading around $340 in 1980 and is now well over
$120,000/share today. Meanwhile, since mid-1990, an investment in
BRK.A would have added about 1700% compared to an S&P 500
return of roughly 300% in the same time period (read
Four ETFs up More Than 30% YTD
).
Clearly, Warren Buffett has been able to perform quite well
over a very long time period, further adding to his mystique and
overall legend. This has led many investors to apply Buffett-like
strategies to their own personal portfolios as well, hoping that
the deep value strategies of Buffett would rub-off on their
overall returns.
In order to tap into these techniques, investors can certainly
buy up Berkshire Hathaway shares as a proxy for Buffett's
methodology. Yet one has to wonder if this is still the
best strategy, given how large Berkshire has become. After all,
it could be argued that Buffett, thanks to the size of his firm,
can no longer apply his strategies as he once could when
Berkshire was much more nimble.
Warren can now only make large bets in order to truly move the
needle, a situation which has undoubtedly hurt the investor's
impressive returns. In fact, a recent study suggested that in the
00's
Buffett didn't add any alpha at all
, a far cry from the nearly 19% alpha that he generated for
Berkshire in 1956-1968 and the 'golden age' of Buffett's
performance in the 1977-1981 period in which he added nearly 30%
a year in excess gains (see
Inside The Two ETFs Up More Than 140% YTD
).
Given this trend, investors may be looking for another way to
apply Buffett-like strategies to their portfolios without the
clear issues that Berkshire is facing. Warren is no spring
chicken at this point anyway, so why take on that added risk of
his retirement (or worse) when it is very easy to apply his ideas
to the broader stock market without Berkshire's help.
One easy way to do this could be by using a number of
specialized
ETFs
in order to tap into the heart of Buffett's philosophy. These
funds offer up Buffett-like exposure but at a fraction of the
risk and overall cost as Berkshire, and furthermore, without the
overhang of Warren's succession plans as well.
With this backdrop, any of the following three ETFs could make
for excellent ways to invest like Buffett from a sector
perspective. The Oracle has definitely developed a few favorite
industries over the past few decades and we believe that the
funds highlighted below offer excellent targeted exposure to some
of Warren's favorite segments making them great ways for ETF
investors to invest like Warren Buffett:
Wide Moat Investing
Arguably Buffett's most famous investing strategy is to go
after so-called 'wide moat' businesses. This type of investing
consists of targeting firms that have easily defendable positions
thanks to their inherent businesses, strategies, or other market
factors (see
Time to Consider Wide Moat ETFs
).
These companies generally have a huge advantage on one of the
following five factors
; intangible assets/brands, switching costs, network effects,
cost advantages, or efficient scale. Any of these factors, or
even a combination of them, generally can provide companies with
a barrier against others, just like a moat.
Warren has definitely utilized this in his investing strategy
over the years, targeting extremely wide moat companies for not
only outright purchase, but investment as well. Some of the more
well-known wide moat investments of Berkshire include
Coca-Cola (
KO
)
-intangible assets,
American Express (
AXP
)
-network effect, and
International Business Machines (
IBM
)
-switching costs.
In order to target a basket of wide moat firms, investors have
a few choices at their disposal although the
Market Vectors Morningstar Wide Moat Research ETF (
MOAT
)
is arguably the best choice.
This relatively new ETF tracks the Morningstar Wide Moat Focus
Index which is a benchmark of 20 companies that have sustainable
competitive advantages. Furthermore, the index only looks at the
most attractively priced ones, ensuring a focus on deep value
securities (read
The Wide Moat ETF Explained
).
Currently, the basket consists of a number of firms in the
tech, materials, industrials, and financials sectors, with firms
that have an advantage on the cost front comprising much of the
portfolio. MOAT also zeroes in on large caps for the most
part-suggesting a low level of volatility-although mid caps also
make up roughly one-fourth of the assets as well.
Volume and AUM are still pretty light for this product, as it
is still less than a year old. Still, the product charges a
reasonable 49 basis points a year in fees and it has handily
outperformed the S&P 500 since its inception, suggesting that
there may be something to the strategy in ETF form.
Transportation Stocks
Another wide moat business is that of the transportation
sector. Competition is oligopolistic as barriers to entry are
extremely high, both in the general delivery business and
especially in the railroad sector.
After all, the building, buying, and maintenance of a massive
railroad empire isn't something that anyone can start in a short
period of time. It is a very capital intensive endeavor,
especially if one is looking to build one that can traverse
across vast distances of the American landscape.
Probably due to this, the railroad industry has always
intrigued Buffett as he was a major investor of Burlington
Northern Santa Fe for quite some time, and he had a modest
holding in Union Pacific as well. Then, Warren went 'all in on
the American economy' buying up the rest of BNSF in a
$44 billion dollar deal
that cemented Buffett's love of the train industry.
While there isn't a pure railroad ETF at this point in time,
investors still have a popular transport ETF in the form of the
iShares Dow Jones Transportation Average ETF (
IYT
).
This ETF unsurprisingly tracks the Dow Jones Transportation
Average, which is a broad benchmark of transport stocks based in
the U.S. This includes all types of transportation stocks,
including passenger, industrial, and general transportation
service firms (see
Is It Time to Buy the Transportation ETFs?
).
Currently, the ETF consists of just 21 holdings overall with
the biggest chunk going to railroads at roughly 31% of assets.
Additionally it should be noted that railroads account for three
of the top five holdings, including Buffett's own UNP at the top
with 13% of assets.
The ETF isn't much of a yield destination, however, as it has
a payout below 1.3%, although its beta is below one, suggesting
that it is a lower volatility choice. Additionally, the product
is reasonable from a fee perspective at 47 basis points a year;
while volume and assets are relatively high, suggesting extremely
tight bid ask spreads for this popular fund.
Insurance Industry
Another long-time favorite of the Oracle is the insurance
industry, the segment that arguably gave Warren his real start in
the investing world. That is because Warren is attracted to the
'float' that these companies have or the investable assets that
firms have before they have to pay out claims on various
insurance policies.
If these assets can be invested effectively, and if they can
be easily paid out when claims eventually rise, they can be a
huge asset for an insurance company that can greatly expand
margins over the long term. Furthermore, Warren argues that these
insurance premiums have a near-zero cost of capital that allows
Warren
to make acquisitions and various other
investments
, virtually interest-free (see
Three Overlooked High Yield ETFs
).
These companies currently form the backbone of Berkshire,
providing the company with billions in float. Some of the more
famous names in the Berkshire portfolio include GEICO and General
RE, giving the firm exposure to both general insurance activities
and reinsurance as well, both of which provide incredible amounts
of cash premiums.
Obviously, this can be easily replicated by any other
insurance company, suggesting that a broad look at the space, in
order to diversify away risk if there is a catastrophe, could be
the way to go. In order to do this, investors have a few
insurance ETFs including the popular
SPDR S&P Insurance ETF (
KIE
)
.
This ETF tracks the S&P Insurance Select Industry Index,
which is a modified equal-weight benchmark. It includes companies
in the American insurance industry including personal and
commercial lines, property/casualty insurance, life insurance,
reinsurance, insurance brokerage and financial guarantee.
With its equal weight methodology, the fund does a great job
of spreading assets around its roughly 46 components, putting no
more than 2.7% in any one security. Still, the product is
somewhat concentrated in property and casualty insurance firms as
these companies account for just under 40% of the fund (read
Protect Your Portfolio with These Insurance
ETFs
).
The fund has a mediocre yield of just 1.7% though, but the P/E
is under ten and the P/B is below 0.9. Investors should also note
that the product charges a reasonable 35 basis points a year in
fees, while its AUM and volume-assets above $110
million-suggest a pretty low bid ask spread.
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BERKSHIRE HTH-A (BRK.A): Free Stock Analysis
Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis
Report
ISHARS-DJ US TR (IYT): ETF Research Reports
SPDR-KBW INSUR (KIE): ETF Research Reports
MKT VEC-MS WMFF (MOAT): ETF Research Reports
UNION PAC CORP (UNP): Free Stock Analysis
Report
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