ETFs That Offer Warren Buffett’s Top Holdings

by Will Ashworth | March 7, 2012 7:00 am

ETFs That Offer Warren Buffett’s Top Holdings

Berkshire Hathaway‘s (NYSE:BRK.B[1]) annual report and shareholders letter came out Feb. 27, and the reaction as usual was fast and furious. Without a doubt, Warren Buffett’s annual State of the Union address[2] has become a must-read. Among the 20 pages of reflection and insight from Buffett is a list of Berkshire’s common stock investments[3] valued at more than $1 billion each. All told, the 14 companies on the list cost $48.2 billion to purchase and were worth $77 billion as of the end of December.

Some investors probably own one or more of these stocks. For those who don’t, I’ve put together a selection of ETFs that gives you ownership in all of these stocks while maintaining a diversified portfolio. But they’re not all created equal.

Option 1 

This is the simplest option: Just find the ETF with the largest position in Berkshire Hathaway, and we should be good to go. As of March 5, that honor belongs to the RevenueShares Financials Sector Fund (NYSEARCA:RWW[4]), which has 8.91% of its portfolio invested in the Class B shares, second only to Bank of America (NYSE:BAC[5]) at 10.38%. We have a winner.

Not so fast. Its expense ratio is 0.49%.

Let’s take a look at the fund with the next largest Berkshire position, which is the Financial Select Sector SPDR Fund (NYSEARCA:XLF[6]) at 7.74% as of March 2. Its expense ratio is one-third less at 0.18%. Both funds seek to replicate the returns of the S&P Financials Index, although the RevenueShares fund is ranked by revenue instead of market capitalization. As a result, its performance has been slightly better over a three-year period through the end of February. If the higher fee doesn’t bother you, then go with RevenueShares.

Option 2

The problem with the first option is you lose the benefits of Berkshire Hathaway’s general diversification (it’s like a giant mutual fund) through the addition of 80 financial institutions. And while you do get some real estate exposure as well as insurance and banking, it does defeat some of the purpose of this exercise. Therefore, it’s probably smarter to find one or two funds that own a good bunch or all of the 14 stocks as well as Berkshire Hathaway itself. That way you get the best of both worlds.

One of my favorite ETF providers is New York-based WisdomTree Investments (NASDAQ:WETF[7]). It seems to do things differently than iShares, Invesco PowerShares and the rest of the competition. Its WisdomTree Earnings 500 Fund (NYSEARCA:EPS[8]) seeks to replicate the returns of the WisdomTree Earnings 500 Index, which is fundamentally weighted to include the 500 largest companies ranked by market capitalization and then re-sorted based on strength of earnings.

Ten of the 14 Berkshire stocks are held, with Munich Re, POSCO, Sanofi and Tesco the exceptions. In addition, Berkshire Hathaway is the 16th-largest holding at 1.2%. What you’re essentially getting is an earnings-based version of the S&P 500. At an expense ratio of 0.28%, it’s very reasonable.

Lastly, we need to find a vehicle that includes the four exceptions. That would be the iShares MSCI All-Country World Ex-U.S. Index Fund (NASDAQ:ACWX[9]), which seeks to replicate the world’s equity markets outside of the U.S. With 1,092 holdings as of March 5, you’re getting excellent country and sector diversification at an annual cost of 0.34%.

Bottom Line

Investors seeking to replicate Buffett’s equity holdings while still getting a good level of diversification are wise to go with Option 2. If you invest 60% in the WisdomTree Earnings 500 Fund and 40% in the iShares All-Country World Ex-U.S. Index Fund, you’ll have covered the entire world of equities at a cost of 0.30% annually.

Three years ago, if you had invested $10,000 in the two funds using the suggested 60/40 split, at the end of 2011 you would have had $14,276. If you’d invested the same $10,000 in Berkshire Hathaway’s Class B stock, you would have had $11,876 — or 16.8% less.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

Endnotes:
  1. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  2. Warren Buffett’s annual State of the Union address: http://investorplace.com/2012/02/are-the-best-days-of-berkshire-and-buffett-behind-us/
  3. list of Berkshire’s common stock investments: http://www.berkshirehathaway.com/2011ar/2011ar.pdf#page=18
  4. RWW: http://studio-5.financialcontent.com/investplace/quote?Symbol=RWW
  5. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  6. XLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLF
  7. WETF: http://studio-5.financialcontent.com/investplace/quote?Symbol=WETF
  8. EPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPS
  9. ACWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACWX

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