Morningstar’s Lee points out that Buffett’s criteria for acquisition include good returns on equity, little or low debt and consistent earnings power.
“The index’s selection rules are simple, common-sense interpretations of Buffett’s criteria,” the analyst wrote.
“This by itself doesn’t mean the index can capture Buffett’s magic. (It can’t.) Buffett takes into consideration valuation, managerial quality, and his assessment of the industry’s future dynamics, among other things,” Lee added. “He doesn’t make many purchases, and when he does he keeps them, whereas this index buys more than a hundred companies and can churn them during its semiannual rebalances. The best that can be said is that if Buffett buys the needle, the index buys the haystack. However, that need not invalidate the strategy, because it’s buying the haystacks where Buffett tends to find needles.”
He said Vanguard Dividend Appreciation (NYSEArca: VIG) is another ETF that adopts Buffett’s precepts.
“VIG works because it buys quality stocks, which have economic moats that enable them to grow their earnings (and dividends) through thick and thin,” Lee writes. [These ETFs Focus on Quality Companies with High Profitability]
Finally, Market Vectors Wide Moat ETF (NYSEArca: MOAT) is yet another ETF that tries to incorporate Buffett’s approach.
Full disclosure: Tom Lydon’s clients own MOAT.