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) (NYSE: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 with an S&P 500 return of roughly 300% in the same time period.
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 00s 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.
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.
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 (NYSEARCA: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.
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.
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 (NYSEARCA: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.
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.
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.
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 (NYSEARCA: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.
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.
Read the full analyst report on UNP (email registration required)
Read the full analyst report on BRK.B (email registration required)
Read the full analyst report on BRK.A (email registration required)