ETFs That Value Investors Buffett, Munger Would Approve Of
Investment guru Warren Buffett and his Berkshire Hathaway (BRK-A) partner Charlie Munger are known for buying good companies at fair prices. Exchange traded fund investors can also mimic the investment philosophy through strategies that target companies with wide economic moats or sustainable competitive advantages.
Specifically, Munger and Buffett consider every aspect of a business when picking an investment, evaluating the management and capital-allocation decision making process, according to Morningstar.
The two analyze a business’ competitive advantages to weed out the few businesses that have endured for multiple generations. Other factors include company’s operating and regulatory environment, the impact on it from changes in technology, hidden exposures, and the current and future impacts of stock options, pension plans, and retiree medical benefits. Lastly, the business’ underlying value is calculated.
Investors who want to capture a group of companies that Munger and Buffett would be invest in can look to broad ETFs covering strategies with staying power.
For instance, the iShares Transportation Average ETF (IYT) tracks a group of U.S. transportation stocks. Munger and Buffett have heavily invested into railroad companies, which make up 23.4% of IYT’s underlying holdings, as a long-term bet on the economy.
Moreover, the ETF includes a 29.7% tilt toward air freight & logistics and 18.8% in trucking, which also rely on macroeconomic conditions.
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The Vanguard Consumer Staples ETF (VDC) includes a 8.9% tilt toward Coca-Cola (KO), a long-time component of Berkshire Hathaway.
Both Buffett and Munger have shown a preference for established global consumer brands. The investment managers also acquired a large stake in H.J. Heinz, which was previously component of VDC, and Heinz bought Kraft Foods to create Kraft Heinz (KHC), the VDC’s 13th largest holding. According to Morningstar data, 80.5% of VDC’s portfolio include firms with wide economic moats.
The Financial Select Sector SPDR (XLF) includes a 8.0% tilt toward Wells Fargo & Co. (WFC) and 1.8% in American Express (AXP), two of Munger and Buffett’s preferred wide-moat financial companies. Additionally, XLF’s largest position is 9.4% in Berkshire Hathaway (BRK-B).
Lastly, the Vanguard Dividend Appreciation ETF (VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years. The dividend growth strategy favors firms with shareholder friendly management and durable competitive advantages.
According to Morningstar data, 87% of the fund’s portfolio is comprised of companies with wide economic moats. The underlying index also seems to focus on firms with lower leverage and ample cash flow, factors that Munger and Buffett both look for.
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