The Oracle of Omaha is undoubtedly one of the greatest investors in history. His flagship conglomerate--Berkshire Hathaway—has grown at about 20% average annual rate and has an excellent record in beating the broader markets in most years since its incorporation in 1965.
They posted a 41% jump in profits for the recent quarter, proving yet again that Buffett has not lost his magic touch. The investment conglomerate with more than 70 operating subsidiaries had about $55 billion in cash on its balance sheet. (Read: 3 MLP ETFs for Excellent Income & Growth)
Many investors may like to emulate Buffett’s time-tested investing style in their personal portfolios. Buying Berkshire shares is always an option for investors but the conglomerate’s sheer size makes it almost impossible to grow at rates seen in the past. That suggests that the stock’s best days may be already behind it.
Buffett himself has warned investors that Berkshire’s growth rate will slow as it becomes larger. Plus the uncomfortable question about Berkshire’s future after Buffett also lingers within investors’ minds. (Read: Protect your portfolio with these multi-asset income ETFs)
However common investors can certainly learn from his investment strategy and style. He likes companies with proven business models generating good returns on capital, that are expected to consistently perform well over a long period of time. Further, these companies provide some stability to the portfolio during turbulent times.
Buffet identifies those businesses that he thinks are trading below their intrinsic values. He believes that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. And he does not care for short term performance of his holdings, if he believes in their long term potential. (Read: 5 Inverse ETFs for a shaky market)
Investors seeking to emulate his investing style should look at these three ETFs that hold the type of companies Buffett would like to invest in.
Market Vectors Wide Moat ETF (MOAT)
The term “economic moat” was popularized by Warren Buffet who said that he seeks "economic castles protected by unbreachable 'moats'.” In simple words, a moat is a unique competitive advantage that allows a company to outperform others in the same industry over time.
Thanks to MOAT, investors can now own a diversified group of such potential winners. The fund has equal-weighted exposure to 20 least-expensive wide-moat companies. These are mostly large-cap companies with sustainable competitive advantage in their respective industries. Bank of New York Mellon, Amgen & Ebay are the top three holdings currently.
Launched in April 2012, the product charges 49 basis points in annual expenses. It has beaten behind the broader market with total return of 49.5% compared with 41.2% return for SPY over the last two years.
The index strategy has worked in the longer term as well. Since inception, the Moat index has recorded average annual returns of 22.4%, versus 20.4% for the S&P index .
iShares MSCI US Quality Factor ETF (QUAL)
QUAL tracks the MSCI USA Index, which is comprised of high quality stocks, by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (:ROE), stable year-over-year earnings growth and low financial leverage. It charges a low expense ratio of 15 basis points.
In general, such companies have sustainable competitive advantage over their peers. The criteria adopted by MSCI in the Quality index broadly matches Buffett’s investing philosophy. The ETF is thus quite a Buffett-like fund.
The product holds 126 securities in its portfolio with Apple, Microsoft and J&J being the top three holdings. Launched in July last year, the fund has already attracted an impressive $430 million in assets so far.
The fund has outperformed the broader market since its inception. Further, the MSCI Quality index has outperformed the MSCI USA index with a 12.2% annualized return versus 11.3% for the latter.
Direxion iBillionaire Index ETF (IBLN)
This new ETF seeks to replicate the investing ideas of billionaire investors. The index is comprised of 30 U.S. large-cap stocks in which a select pool of billionaire investors like Warren Buffet has invested most assets. A set of criteria is used to select 10 billionaire investors from a pool of 50, based on their net worth, source of wealth and portfolio size.
Information regarding the billionaire’s holdings is selected from Form 13F filings. Current top holdings include Williams Companies, Micron Technologies, Apple, Google and Halliburton.
The index follows an equal-weighted approach and thus almost eliminates company-specific risks.
The fund charges investors 65 basis points a year in fees.
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- Warren Buffet