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If Warren Buffett Were an ETF Investor

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Billionaire and superinvestor Warren Buffett knows a good deal when he sees one. Not only does he boast enviable power to cut a great deal but also unparalleled financial resources to do so. In his decades of investing, Buffett has concentrated on stocks as his securities of choice. But if he were to stray from his first love and flirt with exchange-traded funds, what ETFs might he find himself tempted by?

Wish list
In observing Buffett, we know that he likes simple businesses with proven business models, essentially companies that he can hold in his portfolio forever. And the man likes good value. After all, he's a value investor who salivates over a juicy spread between a stock's current price and its intrinsic value.

So let's take a look at a few ETFs that could be considered Warren-worthy and examine why each of these might rouse a twinkle in his eye.

SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA  )
Without a doubt, Warren Buffett is a blue-chip stock investor. According to his most recent annual shareholder letter, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) holds multibillion dollar positions in five of the 30 companies that make up the Dow Jones Industrial Average. These include corporate bellwethers IBM and Procter & Gamble, which have existed for a combined 277 years,  through countless wars, recessions, and natural disasters. In fact, IBM and P&G make up more than 15% of this State Street SPDR Dow Jones Industrial Average ETF.

As a man who likes to save his pennies, Buffett would applaud this ETF's low annual expense ratio of 17 basis points. Even though he doesn't favor returning money to his own Berkshire shareholders in the form of dividends, he'd likely find this ETF's 2.4% dividend yield fairly enticing. Since he also likes companies that boast a long track record of success and have tenure in the business, he'd probably approve of this ETF, as it's traded for 15 of the 20 years that ETFs have existed.

Consumer Staples Select Sector SPDR ETF (NYSEMKT: XLP  )
Buffett's proclaimed love of Cherry Coke and hamburgers indicate that he's a man of simple tastes. This ETF tracks an index that includes companies from some of his favorite industries, like food and beverage, staples retailing, household goods, and personal products. His recent H. J. Heinz deal proves his affection for savory pleasures, both for the taste buds and the bank account.

Buffett owns billions of dollars of both consumer staples heavyweights Coca-Cola and Wal-Mart stocks, which comprise 10% and 8%, respectively, of the Consumer Staples Select Sector SPDR ETF. This ETF boasts an attractively low annual expense ratio of 18 basis points and also pays a generous 2.8% dividend yield. Considered longevity in the ETF world, this particular fund has existed since 1998.

iShares Dow Jones US Financial Sector ETF (NYSEMKT: IYF  )
In the depths of the financial crisis, Buffett was called upon to help out some very big banks. In exchange, he received sweetheart deals that small-fry investors like you and me couldn't possibly come close to obtaining. As a result, in the wake of the crisis, he has substantially increased his holdings in financial services stocks.

In fact, some of Berkshire Hathaway's top stock holdings are American Express, Wells Fargo, and US Bancorp. Wells Fargo represents Buffett's top stock, at an approximate market value of $16 billion. That's a 9% ownership of the bank. The BlackRock iShares Dow Jones US Financial Sector ETF holds all three of these Buffett financial sector favorites. More than 10% of the ETF's holdings are in these very stocks.

This ETF has been trading for 13 years. It boasts close to a 1.6% dividend yield, which will likely increase as many large banks recently passed stress tests that'll allow them to increase their dividends. This financial sector ETF has a 0.47% annual expense ratio, perhaps a tad pricey for Buffett's taste but still a reasonable fee.

Foolish bottom line
So far, Warren Buffett hasn't shown a lick of interest in ETFs. But for Buffett disciples who want to either invest in ETFs or just diversify beyond individual stocks, these three provide a good start.

To learn about a few more ETFs that have great promise for delivering profits to shareholders in a recovering global economy, check out The Motley Fool's special free report "3 ETFs Set to Soar During the Recovery." Just click here to access it now.

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9/27/2016 4:00 PM
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