Buffett finally enters the ETF market

Warren Buffett has given arguably the “ultimate endorsement” to ETFs after making his first foray into the US$4.6 trillion market.

The legendary investor’s Berkshire Hathaway Inc. added to the Vanguard S&P 500 ETF, ticker VOO, and SPDR S&P 500 ETF Trust, known as SPY, in the final quarter of 2019, according to a regulatory filing.

According to a BNN Bloomberg report, the relatively small investments, which totalled US$25 million across both funds, are Berkshire’s only publicly disclosed ETF holdings in its most recent quarterly 13F filing. The investments are in a pension plan, according to Buffett’s assistant, Debbie Bosanek.

Buffett, whose Berkshire holds a record US$128 billion in cash and U.S. Treasury bills, is set to release its annual letter to shareholders on Saturday.

The fourth-quarter addition is arguably the “ultimate endorsement” for ETFs and their different usages, according to Bloomberg Intelligence’s Eric Balchunas. Large institutions will often park money in ETFs to keep exposure to the market while minimizing cash drag in their portfolios, he said -- which is likely what Berkshire has started to do with its record cash pile.

“They use it almost as a temporary parking spot, and I think the liquidity is what they’re attracted to,” Balchunas said.

In that scenario, ETFs are essentially being used as an alternative for derivatives contracts, Balchunas said. He estimates that this manner of institutional usage accounts for roughly 5 per cent to 10 per cent of ETF assets.

Climbing cash pile
Berkshire has accumulated a more than US$71 billion stake in Apple Inc. in recent years and purchased stock in Kroger Co. and Biogen Inc. during the last three months of 2019.

Still, it failed to find a massive acquisition of a company to keep growing the conglomerate in recent years. That’s weighed on Berkshire stock with the Class A shares increasing nearly 11 per cent last year, short of the almost 29 per cent gain in the S&P 500 during the same period.