Revisiting Beating Buffett With ETFs

Given that the Berkshire Hathaway BRK equity portfolio is currently comprised of more than 40 securities, many investors face a daunting task when it comes to playing copycat on Warren Buffett's individual stock picks.

Since many folks do not have the capital to own 40-plus positions for size, ETFs have previously been highlighted as an efficient way for investors to get wide-ranging exposure to the stocks Berkshire holds.

In fact, ETFs are a remarkably efficient way of playing alongside Buffett. An ETF such as the SPDR Dow Jones Industrial Average ETF DIA along with consumer staples and financial services sector funds will help retail investors gain exposure to the bulk of Berkshire Hathaway's holdings. There is a rub when constructing a Berkshire ETF portfolio and it is this: The ETF ideas most frequently tossed as the best ways of mimicking Buffett lack originality.

That is not say the ideas themselves are not accurate. Looking at Berkshire's equity holdings at the end of the fourth quarter, it is easy to see the Consumer Staples Select Sector SPDR XLP and the iShares Dow Jones U.S. Financial Sector Index Fund IYF, among other ETFs, were fine ideas for getting exposure to plenty of Berkshire holdings.

However, investors could have done better, at least in the first quarter, by putting more emphasis on the sectors in which Berkshire's holdings lie, rather than focusing on the ETFs that allocate large portions of their weights to so-called Buffett stocks. Here are some examples.

First Trust Consumer Staples AlphaDEX Fund FXG
XLP makes for a great, low-cost way of accessing plenty of Berkshire's equity holdings. The largest consumer staples ETF is the second-cheapest with an expense ratio of just 0.18 percent per year and half of the ETF's top-10 holdings are also Berkshire holdings. Those stocks are Procter & Gamble PG, Coca-Cola KO, Wal-Mart WMT, Kraft KRFT and Costco KRFT.

Additionally, staples have been a leadership group for a significant part of this rally, so it is hard to quibble with the 14.5 percent XLP returned in the first quarter. That is until an investor hears about the First Trust Consumer Staples AlphaDEX Fund FXG.

FXG is weighted based on growth and value metrics, not market capitalization. In other words, FXG may be home to a few of Berkshire's staples holdings, but they are not large parts of the ETF. For example, Procter & Gamble does not even account for 0.8 percent of FXG's weight. The difference was clear in Q1 when FXG returned 21 percent while only being slightly more volatile than XLP.

Vanguard Financials ETF VFH
Buffett's affinity for financial services stocks is well-known. Berkshire's lineup included stakes in American Express AXP, Bank of New York Mellon BK, MasterCard MA, US Bancorp USB and Wells Fargo WFC, among others at the end of Q4. The company's first-quarter 13F will show a stake in Goldman Sachs GS after Berkshire recently exchanged warrants for a smaller equity stake in the venerable Wall Street bank.

Those holdings and others would make investors IYF or the the Financial Select Sector SPDR XLF would be the best ways of playing alongside Buffett in this sector. In the first quarter, the best choice was actually the Vanguard Financials ETF VFH. VFH is similar in terms of holdings to XLF, though the Vanguard offering was the better Q1 performer while also being less volatile.

Investors looking to go in a different direction can consider the PowerShares KBW High Dividend Yield Financial Portfolio KBWD. That ETF is home to mortgage REITs and business development companies along with traditional banks and exchange operators. There are no Berkshire holdings in KBWD, but that did not matter in Q1 as the ETF returned 14.6 percent. KBWD was also less volatile and pays a monthly dividend, something other financial services ETFs cannot say.

PowerShares Dynamic Media Portfolio PBS
The caveat here is that the PowerShares Dynamic Media Portfolio does not represent an alternative to another ETF that is a way of accessing Buffett media stocks. Rather, the PowerShares Dynamic Media Portfolio is THE way of gaining exposure to the legendary investor's media stakes, which included Gannett GCI and Starz STRZA at the end of the first quarter.

Those are the Berkshire holdings that are also found in PBS, though Buffett's firm has stakes in several other media companies. Of the ETFs highlighted in this piece, only FXG beat the 17.5 percent returned by PBS in the first quarter. Investors should note PBS does devote about 10 percent of its weight to "un-Buffett" stocks Yahoo YHOO and Google GOOG.

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