On the surface, comparing a company to an exchange-traded fund (ETF) is obviously not an apples-to-apples comparison. But the lines get blurred a little bit when the company in question is Berkshire Hathaway (BRK.A 1.32%) (BRK.B 0.77%), which is usually classified as a financial stock and is more of a conglomerate than it is a single company.
Would investors be better off with an investment in Berkshire Hathaway today or in the Vanguard Financials Index ETF (VFH 0.54%)?
What does the Vanguard Financials Index ETF do?
Tackling the easier-to-explain investment first, the Vanguard Financials Index ETF is, as its name implies, a sector ETF focused on financial stocks. It owns around 400 stocks. Its largest exposures are to diversified banks (20.2% of assets), transaction and payment processing services (15.6%), multisector holdings (9.3%), property & casualty insurance (9%), and financial exchanges and data (8%). Basically, it does what its name implies: provide broad exposure to the financial sector.
Image source: Getty Images.
The expense ratio is a reasonable 0.09%. The ETF is fairly large, with $12 billion in assets. And it has a modest, but above-market-average, dividend yield of around 1.8%. If you are looking for broad exposure to the financial sector, it is a reasonably strong choice.
What does Berkshire Hathaway do?
As already noted, Berkshire Hathaway is a conglomerate, but it’s useful to know that it is built around the company’s insurance businesses. The performance of insurance businesses can vary greatly from period to period, depending on what is going on with claims, but the benefit of the business to Berkshire Hathaway is the “float.”
Basically, insurance premiums come in before claims, usually leaving insurers with cash to invest. Most insurance companies simply buy conservative investments, like bonds. Berkshire Hathaway uses its float to invest in both publicly traded companies and companies that it buys in their entirety.
This is no small issue. On top of its large (in dollar value) portfolio of dozens of publicly traded stocks, Berkshire Hathaway has 189 subsidiaries. The businesses Berkshire Hathaway has invested in range from well-known consumer staples giant Coca-Cola, which is in the publicly traded stocks portfolio, to BNSF, a train company that is owned outright. There is a lot of variety in the company mix, which makes Berkshire Hathaway something similar to a mutual fund in a lot of ways.
Buy the financial ETF or the financial stock?
This is where things get a little complicated. If you are looking for financial exposure, you can get that with either the Vanguard Financials Index ETF or Berkshire Hathaway. But you are also getting much more when you buy Berkshire Hathaway, so investors seeking a pure play on the financial sector will probably want to stick with the Vanguard Financials Index ETF.
Data by YCharts.
The problem here is that, as the chart highlights, the Vanguard Financials Index ETF has lagged both the S&P 500 (^GSPC 0.41%) and Berkshire Hathaway over time. While it will provide focused exposure to financials, that may not be the best choice for all investors. Berkshire Hathaway has a much better track record, thanks at least partly to its more diversified portfolio of investments.
The success of Berkshire Hathaway has much to do with the investment process of CEO Warren Buffett and his team. To simplify, Buffett likes to buy good businesses when they are reasonably priced, if not cheap, and hold them for the long term. This allows him to benefit from the growth of the businesses he owns over time.
The sector in which a business operates is just one of many things Buffett and his team consider. That’s very different from buying a sector-specific ETF.
In the end, a lot will depend on your personal investment goals when comparing the Vanguard Financials Index ETF and Berkshire Hathaway. Broad financial exposure is really all you are getting with the Vanguard Financials Index ETF. But if what you really want is to invest alongside a skilled investment team, well, you’ll be hard-pressed to find a better option than Berkshire Hathaway.