Is There a Warren Buffett ETF?

By Eric Balchunas  

Photographer: Jeff Kowalsky/Bloomberg

Warren Buffett, chief executive officer of Berkshire Hathaway Inc.

It's a question ETF analysts are used to. The short answer is that no exchange-traded fund can replicate Buffett's investing brilliance.
For access to that, investors can buy Berkshire Hathaway B shares (BRK/B), which have gained 16 percent this year. Berkshire’s stock portfolio accounts for a minor portion of its earnings, though, and Buffett has two portfolio managers doing some of the stock picking now.
While there's no Buffett-in-a-box, a handful of ETFs are often labeled Buffett-esque. Here's a look at three that offer convenient, low-cost ways to
get a piece of that oracular action out in Omaha.

• Market Vectors Wide Moat ETF (MOAT)
  

Buffett likes companies with “wide moats,” or sustainable competitive advantages. MOAT, which tracks the Morningstar Wide Moat Index, tries to identify such companies.
Morningstar equity researchers screen 1,500 stocks looking for, among other things, whether a company has a cost advantage that lets them undercut rivals -- think Wal-Mart Stores Inc. (WMT). Only 10 percent of stocks get the wide moat rating. The analysts then pick the 20 cheapest based on Morningstar’s fair value calculations and add them to the index at equal weightings.
In the past 12 months, MOAT has returned 21 percent, shy of the S&P 500's 23 percent. From its 2012 inception, it is up 58 percent, to the S&P 500’s 50 percent. MOAT has doubled in size in the past year, to $823 million. The annual fee is 0.49 percent of assets, on the cheap side for a souped-up ETF.
There are a few issues to consider. One is overlap with other ETFs investors may hold. Most of MOAT’s holdings are large-cap stocks with decent weightings in other major ETFs. Also, MOAT rebalances quarterly, and 40 stocks went in and out of the ETF over the past year. That's a lot for an ETF that holds 20 stocks at a time. It's held just one stock -- Exelon Corp. (EXC) -- since its launch. High turnover is definitely not part of Buffett’s philosophy; Buffett has said that "our favorite holding period is forever."

• iShares MSCI USA Quality Factor ETF (QUAL)
  

Buffett has cited good returns on equity, consistent earnings power and low debt as elements ofhis acquisition criteria. And those three measures are what QUAL, one of four "factor" ETFs launched by iShares last year, focuses on in its portfolio. Factors are characteristics shared by a group of stocks, like size or momentum, that explain their excess return over the market in certain periods. MSCI identifies six factors -- quality, value, small size, low volatility, high yield and momentum.
QUAL targets large- and mid-cap companies with high return on equity, stable year-over-year earnings growth and low debt. It currently holds 126 stocks, and a combined 20 percent of the portfolio is in Microsoft Corp. (MSFT), Apple Inc. (AAPL), Exxon Mobil Corp. (XOM) and Johnson & Johnson (JNJ). QUAL has 35 percent in tech; Buffett has largely avoided tech.
Since its July 2013 start, QUAL is tied with the S&P 500. It has $494 million in assets and charges a low 0.15 percent.

• Vanguard S&P 500 ETF (VOO)
  

Perhaps the most Buffett-esque ETF of all is one with a strategy far simpler than the others. In a 2013 shareholder letter Buffett wrote about some advice he has for his wife in his will:

“Put 10% of the cash in short-term government bonds and 90% in a low-cost S&P 500 Index fund (I suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

ETF investors who want to follow this advice can use VOO, the cheapest of the cheap S&P 500 ETFs. It charges 0.05 percent. Nearly every stock held by Berkshire is in VOO. For the government bond portion, there's the Vanguard Short-Term Government Bond ETF (VGSH), which charges 0.12 percent.
For investors serious about following Buffett’s philosophy, it’s hard to argue with a VOO/VGSH mix, adjusted to one's risk tolerance. While MOAT and QUAL are intriguing, Buffett did warn shareholders in 2009, “Beware of geeks bearing formulas.”