Buffett’s Berkshires are being packaged into leveraged ETFs

Warren Buffett created Berkshire Hathaway Inc.’s Class B shares nearly 30 years ago to fend off money managers who wanted to split high-priced conglomerate stocks.

One of South Korea’s largest retail brokerages now plans to package Class B shares with derivatives into a turbocharged exchange-traded fund, which Buffett may not like.

Kiwoom Securities Co. teamed up with Milwaukee-based Tidal Investments to create an ETF designed to provide 200% of Berkshire’s daily performance, according to a regulatory filing.

Single-stock ETFs like this one, Nvidia Corp. and Tesla Inc. Like high flyers are expanding the world of funds, using leverage to increase their potential returns — and losses. Asset Securities Co. US stocks are trying to capitalize on rising demand amid sluggish performance of domestic equities.

“Traditionally on leveraged ETFs, the lion’s share of interest and asset flows have been on more volatile names,” Tidal Chief Revenue Officer Gavin Fillmore said in an interview. “Berkshire is almost the polar opposite.”

Leveraged ETFs are often for active traders who want to bet on a stock’s performance for more than a day, as these funds typically diverge when tracking stocks over longer periods of time. Berkshire’s use of derivatives for return interest may not sit well with Buffett, who once called them “financial weapons of mass destruction.”

While Buffett’s firm is a household name, it remains to be seen whether day traders will have the appetite to run stable stocks with this type of leveraged strategy. Buffett is known as the ultimate long-term investor who advises people to hold stocks that they are comfortable holding for years.

Buffett, 94, and his firm already have a following in South Korea. As of Nov. 8, individual investors in South Korea owned more than $800 million worth of Berkshire Class A and Class B shares, according to data compiled by the Korea Securities Depository.

Matthew Palazzola, an insurance analyst at Bloomberg Intelligence, said Asian markets “have an attraction for Berkshire.”

The ETF listing has not yet been finalized and Kivoom is awaiting approval from the Financial Supervisory Service of Korea, the country’s financial watchdog, Kivoom said in response to a question from Bloomberg. Berkshire representatives did not respond to a message seeking comment.

Retail investors in South Korea have embraced some of the largest leveraged ETFs listed in the US. Direxian Daily TSLA Bull 2X Shares, a single-stock ETF for Tesla stock, has taken in $225 million from South Korean retail investors so far this year, increasing their total holdings in the ETF to $1.2 billion as of Nov. 8. Depository Data.

While the Kick BRK 2X Long Daily Target, as it’s known, will be the first Berkshire single-stock ETF in the U.S., several others trade overseas. However, they failed to get much of the following: Leverage Shares 2x Long Berkshire Hathaway ETP Securities, which trades on several European exchanges, has only $2.3 million in assets.

Kivoom’s new ETF will buy Berkshire Class B shares and then offer its own stock to investors, likely at a much lower price than the $467.36 each Class B share sold for at the market close on Monday. To maximize its exposure to Berkshire’s daily returns, the ETF will swap with broker dealers and also trade listed options on the Omaha, Nebraska company’s B shares.

The Berkshire ETF will be a keynote product that operates behind the scenes in return for a fraction of Tidal’s management fees.

‘Stained Reputation’

Wall Street’s efforts to create an early version of a single-stock fund for Berkshire shares prompted Buffett to create the company’s Class B shares nearly three decades ago. At the time, Berkshire had only one class of stock trading at more than $30,000 per share, and ETFs were in their infancy.

In 1995, Philadelphia politician Sam Katz filed papers to create a unit investment trust, a fund-like vehicle that buys a fixed portfolio of stocks and bonds up front and then holds the securities for a fixed period of time. He wrote that the trust “will provide convenient and affordable access to Berkshire Hathaway’s common stock without the need to own the entire stock.”

Berkshire threatened to put the trust out of business by doing a stock split, setting up its own trust or creating another share class, Katz said in an interview.

Buffett made good on that last threat by issuing Class A shares at 1/30th of a Class A share. Investors flocked to the new stock, rendering Katz’s trust obsolete.

In a 1996 letter to shareholders, Buffett warned that such trusts were “cost-laden” vehicles that brokers would market “to a mass of unsuspecting buyers” to earn large commissions. That would burden Berkshire with “thousands of unhappy, indirect owners (trustholders, that is) and with both a tarnished reputation.”

Katz said he has no regrets: “How many people do you know who want to go to war with Warren Buffett?”