Berkshire Hathaway (BRKA 0.21%)(BRKB 0.17%) is widely known as one of the most stable buy-and-hold stocks in the market. It owns a collection of businesses, many of which are designed to work well in any economic climate, has unmatched financial flexibility, and has an incredible track record of disciplined capital allocation.
However, Berkshire is generally not considered an exciting investment. Although the stock has a history of stellar returns dating back to when Warren Buffett took over as CEO in the 1960s, the numbers are simply too large to sustain 20% annualized returns over the next few decades, as it has in the past.
Image source: The Motley Fool.
Investors who want to invest in Berkshire but also want higher return potential have a new option available -- the Direxion Daily BRKB Bull 2X ETF (BRKU 0.20%). This leveraged ETF aims to deliver twice the daily returns of Berkshire Hathaway stock. For example, if Berkshire were to rise by 2% today, this ETF could be expected to rise by 4%.
However, leveraged ETFs aren't right for everyone. Here's what you need to know before you consider this form of Berkshire exposure in your portfolio.
Leveraged ETFs aren't for everyone
For starters, leveraged ETFs tend to have higher investment expenses, and this ETF is no exception. The Direxion Daily BRKB Bull 2X ETF has a net expense ratio of 0.97%, which means that a $10,000 investment will incur $97 in fees annually.
It's also important to point out that the effects of leveraged ETFs go both ways. They can produce excellent returns when the underlying stock is soaring, but they can also amplify your losses when a stock declines. For example, as a simplified example, let's say that a $100 stock falls by 3% per day for 20 days in a row (similar situations have happened in particularly rough periods -- obviously not exactly 3% every day, but long-term losing streaks have happened).
Without leverage, a losing streak like this would cause the stock to decline to about $56 per share. However, the leveraged version would lose 6% per day, and its $100 share price would decline to just over $30 after that long losing streak.
If a stock performs particularly well over a period, a leveraged ETF can work out favorably. As one real-world example, the ProShares UltraPro QQQ (TQQQ 4.32%) leveraged Nasdaq ETF has produced a 2,750% total return over the past decade, compared with 531% for the unleveraged version. But this isn't a common outcome, so keep this in mind before you invest.
To be perfectly clear, investing in the Direxion Daily BRKB Bull 2X ETF is likely to be volatile and is not mathematically favorable for riding out the market's ups and downs. It can work out well if Berkshire essentially goes straight up over time (like the Nasdaq has essentially done over the past decade, but it's important to realize that isn't a particularly likely outcome.
