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Follow Warren Buffet with These ETF Strategies

Everybody dreams of becoming rich and famous like Warren Buffett, Carl Icahn, Daniel Loeb and David Tepper. After all, these Wall Street gurus have successfully put their money in the right place and continue to reap huge returns.

Buffett’s Berkshire Hathaway Inc. (BRK.B) has enjoyed an average growth rate of about 20% annually. Furthermore, Berkshire Hathaway has added more than 80% over the last five years (as of May 5, 2016) that is better than the gain of over 69% from the broader market ETF SPDR S&P 500 ETF (SPY) during the same timeframe.

Thanks to this feat, following billionaires’ investment strategies is a fad. While investing in Berkshire is always a good way of following Buffett, who is commonly known as The Oracle of Omaha, there are numerous other ways to reproduce this stock market veteran’s investment theme and add a spark to one’s portfolio.

Normally, Buffett takes interest in companies trading below what he believes is their intrinsic value. He aims long-term outperformance and apparently ignores short-term travails. Since there is a huge craze of Buffett-style investing, we analyze below a few key investing strategies derived from Berkshire Hathaway’s annual general meeting. We also highlight the related ETFs for investors who want to follow this investment veteran.

Excuse Yourself from IPOs

The global IPO market has been on a tear lately and people churned out enough money from it. A rock-bottom interest rate environment and an even more impressive performance by the U.S. stock indices charged up the IPO market.

IPO ETF First Trust US IPO Index Fund (FPX) returned about 94% in the last five years (as of May 4, 2016), but the wining trend seem to be waning lately. The fund was off about 5.8% in the last one year and is down 1.9% so far this year (as of May 4, 2016) (read: Another Blowout Quarter for Facebook: ETFs to Ride On).

But Buffet seems to be no fan of IPOs and finds them risky bets. As investors get to know very little about the company’s past or financial record, this technique does not go well with value investing.

Berkshire on Acquisition Spree; Time for M&A ETF?

Berkshire Hathaway Inc. acquired Precision Castparts, one of the leading manufacturers of aerospace components in a $37.2 billion deal, in the first quarter of 2016. Also, Buffett indicated that Berkshire Hathaway will continue to chase large acquisitions, going forward. This means that big acquisitions will likely be in the cards and investors can play IQ Merger Arbitrage ETF (MNA) to cash in on the likely booming trend (read: Merger & Acquisition ETFs: Will 2016 Replicate 2015?).

Buffett’s Confusion with Negative Rates: Where to Find Yield?

As several central banks are now practicing negative rates right from the ECB to BoJ, income from government bonds have declined considerably. Even in the U.S., interest rates have been at very low levels. But these hurt several corners of the business world like the financial sector. In fact, retirees also find it hard to earn interest income. Buffett is unsure about this policy as “anything that reduces the value of having money is going to affect Berkshire” (read: ETF Picks for a Retirement Portfolio).   

Keeping these issues in mind, investors can go for some safe but high-yielding products like PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD). The fund yields 3.33% annually (as of May 5, 2016). For European market, investors can play with First Trust STOXX European Select Dividend Index Fund (FDD). FDD yields 4.09% annually (as of May 5, 2016).

Warren Buffett is long on Euro: Should you Really Follow this One?

Don’t get shocked! Yes, Buffett, who is a benevolent promoter of the value investing, has said that Berkshire Hathaway owns Euros. In this case, think twice before copying him because Berkshire Hathaway has huge business exposure in Europe and uses the currency as payments for its operations there.
But we warn investors not to be outright bullish on euro as the ECB is on a super easing mode. Though the currency lately gained strength on a weaker greenback and certain improvement in the Euro zone, the rally can lose momentum anytime. So, better be watchful before betting on Euro ETF CurrencyShares Euro ETF (FXE) (read: Top and Flop Currency ETFs YTD).

Have Faith in U.S. GDP: What to Play?

Buffett admits that the U.S. GDP growth is certainly sluggish, but not awful. Though Q1 GDP was lackluster, the momentum can pick up in Q2. Plus, dollar has moderated lately on a dovish Fed, which in turn can boost exports.

We suggest playing mid-cap value ETFs which offer the best of both the worlds – small and large. These have limited foreign exposure and are thus expected to gain from a falling U.S. dollar. Thus, a softer dollar and a slowly improving U.S. economy make a winning combination for mid-cap ETFs. Mid caps are less volatile than small-cap stocks. Vanguard Mid-Cap Value ETF (VOE) is an example among many that can be tapped to play the trend.

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FT-IPOX 100 (FPX): ETF Research Reports
IQ-MERGER ARB (MNA): ETF Research Reports
PWRSH-SP5 HI DV (SPHD): ETF Research Reports
FT-STX EURO SEL (FDD): ETF Research Reports
CRYSHS-EURO TR (FXE): ETF Research Reports
VANGD-MC VALUE (VOE): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
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