How To Use ETFs To Invest Like Warren Buffett

by on May 5, 2010 | ETFs Mentioned:

Last weekend, shareholders of Berkshire Hathaway descended on the Qwest center in Omaha, Nebraska to hear a few words of wisdom from the legendary investor and CEO of the company, Warren Buffett. For this annual shareholder meeting, over 35,000 people packed into the arena for what has become popularly known as the “Woodstock for capitalists,” in which investors from all over the world gather to hear Buffett’s outlook on the company and the economy as a whole. As usual, Buffett did not disappoint; he and sidekick Charles Munger answered numerous questions from the shareholders on a wide variety of topics. Buffett has grown Berkshire from a fledgling New England textile mill into one of the world’s largest and most respected companies with investments in a number of industries. This was done by a series of shrewd investments that put a premium on value investing and stable companies that could produce growth for many years to come. This philosophy has allowed Buffett and Berkshire to beat the market by an average of 11% a year over roughly the past 30 years according to the Motley Fool. Not surprisingly, this impressive track record has spawned a generation of investors that seek to implement Buffett’s principles in managing their portfolios (see ETFs To Play Along With Soros, Paulson, and Fournier).

Buffett isn’t a big fan of ETFs, preferring to establish positions in individual stocks. But with ETFs now offering exposure to nearly every corner of the U.S. and global economy, there are plenty of ways to play the Oracle of Omaha’s views on the economy through exchange-traded products. Below, we highlight three ETFs that offer exposure to regions and sectors that Buffett believes may have a bright future ahead of them (also read How To Build A Simple And Effective All-ETF Portfolio).

Broker-Dealers

Despite a plethora of bad press lately, Warren Buffett praised much-maligned Goldman Sachs and defended their actions in the recent crisis. “I don’t have a problem with the Abacus transaction at all, and I think I understand it better than most,” said Buffett according to Barron’s. This quote suggests that Buffett believes that the current scandal plaguing Goldman is overblown and will soon pass by, leaving investors with an excellent opportunity to get in on the firm at a cheap price, a favorite tactic of Buffett’s over the years. For investors seeking exposure to Goldman and its competitors, the iShares Dow Jones U.S. Broker-Dealers Index Fund (IAI) presents a compelling choice. The fund allocates nearly 10.4% of its assets to Goldman Sachs, by far the most out of any ETF (also read Broker-Dealers: The Best Financial ETFs?).

Transportation

The $26.7 billion deal for Burlington Northern Santa Fe was seen by Mr. Buffett as an “all in bet on the American economy.” It appears as if Buffett believes that more goods will be shipped via rail in the near future and that manufacturing and consumer spending are due for an uptick (also read Will Buffett’s Railroad Bubble Derail Transportation ETF?). Unfortunately, there is not a railroad ETF currently on the market, but iShares Dow Jones Transportation Average Index Fund (IYT) is pretty close. The fund tracks the Dow Jones Transportation Average Index and has produced a gain of 11.5% so far this year. Some of its top holdings include Federal Express (11.7%), Union Pacific (8.9%), and UPS (8%). See more information about IYT on its fact sheet.

China

Both Buffett and Munger predicted that China will be booming in the years ahead. “You’ve got well over a billion people who are just beginning to realize their potential,” said Buffett. This sentiment is underscored by a recent investment that Berkshire made in the country; the firm purchased 9.9% of Chinese car marker and lithium battery and solar panel manufacturer, BYD Co. For investors seeking to follow Buffett’s lead into China, there are currently a wide range of ETFs tracking the Chinese market in the China Equities ETFdb Category. Among the most popular is the iShares FTSE/Xinhua China 25 Index Fund (FXI), which tracks some of the largest companies in the China equity market by tracking the FTSE/Xinhua China 25 Index. However, for investors seeking a China investment that doesn’t focus on multinational firms, Claymore/AlphaShares China Small Cap Fund (HAO) or Global X China Consumer ETF (CHIQ) may make interesting choices given their focus on small cap firms and the Chinese consumer respectively (also see Beyond FXI: Three Alternatives To The Popular China ETF).

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Disclosure: No positions at time of writing.