This has been another great year for the broader stock market indexes. And while it’s true that megacap growth stocks have been leading these indexes to new heights, many value stocks are also delivering sizable gains.
Investment management firm Vanguard has a low-cost exchange-traded fund (ETF) that targets megacap value stocks. It holds Warren Buffett-led Berkshire Hathaway (BRK.A 0.07%) (BRK.B -0.01%), as well as top Buffett stocks Coca-Cola, Bank of America, and Chevron. Here’s why the Vanguard Mega Cap Value ETF (MGV 0.32%) could be worth buying now.
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Looking beyond Berkshire Hathaway’s public equity portfolio
The Vanguard Mega Cap Value ETF is chock-full of excellent value stocks, many of which pay dividends. However, the fund is highly diversified, starkly contrasting Buffett’s strategy of investing heavily into high-conviction ideas.
The largest five holdings in the Mega Cap Value ETF make up just 15.5% of the fund, whereas Buffett’s top five holdings — Apple, American Express, Bank of America, Coca-Cola, and Chevron, make up 65.6% of Berkshire’s public equity portfolio. However, the concentration is a bit misleading considering Berkshire holds more cash than the entire value of its public equity portfolio, and it owns businesses that aren’t public companies, including several insurance firms, retail, manufacturing, and service companies, BNSF Railroad, Berkshire Hathaway Energy, and more.
Pairing ETFs with individual stocks
ETFs can be an excellent way to get broad-based exposure to many different companies. But investors interested in specific stocks may be better off pairing an ETF with stock holdings to increase their exposure to their highest-conviction ideas.
For example, Berkshire Hathaway, Bank of America, Chevron, and Coke comprise 9.6% of the Mega Cap Value ETF. If you wanted to put, let’s say $1,000 to work in megacap value stocks and have around 30% of that go into Berkshire’s top value stocks, then a simple approach would be putting $800 in the Mega Cap Value ETF and then $200 into Berkshire Hathaway, Bank of America, Chevron, and Coke.
It would be challenging to deploy lower amounts of money into multiple stocks in years past due to trading fees and variants in nominal stock prices. But in today’s age of zero-commission stock trading and fractional shares, it’s relatively easy to invest however much you want in whatever company you want for free on most brokerages.
Berkshire Hathaway is a buy
Another way to invest in top Buffett stocks is to simply buy Berkshire Hathaway stock directly. Berkshire’s market capitalization sits at $1.03 trillion at the time of this writing, with its public equity portfolio valued at $298.2 billion and $325.2 billion in cash and cash equivalents. This means the rest of the company is actually the most valuable part at roughly $403.3 billion. Many of these companies are cash cows with fairly predictable revenue streams and established business models.
However, one drawback of Berkshire Hathaway is that it doesn’t pay a dividend because Buffett prefers to use excess capital to reinvest in the business or repurchase Berkshire stock (which has been a winning formula). Therefore, investors looking for a mix of value and income may prefer the Mega Cap Value ETF, which yields 2.3%, or even higher-yielding options like Coca-Cola, which yields 3%, or Chevron with its 4% yield.
Taking a balanced approach to value investing
Long-term investing is all about identifying high-conviction ideas that you are comfortable putting your hard-earned savings into and holding over time. When buying an individual stock, it’s important to have a clear investment thesis. Berkshire’s stamp of approval on Bank of America, Chevron, and Coke can be a part of that thesis, but it’s important to do additional research into each company to determine what makes it a good buy over alternatives.
ETFs, by their nature, are more passive tools than individual companies, but they still require an investment thesis. The Mega Cap Value ETF is appealing because it is operated by a reputable investment management firm, has a mere 0.07% expense ratio (which is dirt cheap), isn’t overly concentrated in its top holdings, and focuses on the largest value stocks — which may be a good fit for investors looking to avoid high-flying growth stocks.
All told, directly investing in top Buffett stocks or Berkshire Hathaway stock is the best way to follow in Buffett’s footsteps, but the Mega Cap Value ETF is an excellent tool for set-and-forget investors to put capital to work without having to worry about over-allocating toward a handful of stocks.
Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Chevron. The Motley Fool has a disclosure policy.
