(Bloomberg) — Warren Buffett created Berkshire Hathaway Inc.’s Class B shares nearly three decades ago. to thwart money managers who tried to split the expensive conglomerate’s shares.
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One of South Korea’s largest retail brokers now plans to package its Class B shares into an exchange-traded fund full of derivatives, another move that Buffett may not like.
Kiwoom Securities Co. partnered with Milwaukee-based Tidal Investments to form an ETF designed to deliver 200% of Berkshire’s daily performance, according to a regulatory filing.
Single-stock ETFs like these have taken the fund world by storm, using leverage that maximizes the potential returns (and losses) of high-flyers like Nvidia Corp. and Tesla Inc. enlarged. In South Korea, brokers such as Toss Securities and Mirae Asset Securities Co. has sought to capitalize on rising demand for U.S. stocks while domestic equities have been sluggish.
“Traditionally, leveraged ETFs have seen the lion’s share of interest and asset flows go to the more volatile names,” Gavin Filmore, chief revenue officer at Tidal, said in an interview. “Berkshire is almost the opposite.”
Leveraged ETFs are often aimed at active traders who don’t want to bet on a stock’s performance for more than one day, as these funds tend to veer off course when tracking stocks over time. The use of derivatives to undermine Berkshire’s returns may not go down well with Buffett, who once called them “financial weapons of mass destruction.”
While Buffett’s company is a household name, it remains to be seen whether day traders will make sense to ride this kind of leveraged strategy on a stable stock like this. Buffett is known as the ultimate long-term investor who advises people to own stocks that they can easily hold for years.
Buffett, 94, and his company already have a following in South Korea. Individual investors in South Korea owned more than $800 million worth of Berkshire Class A and Class B shares as of Nov. 8, according to data compiled by the Korea Securities Depository.
Asian markets “are partial to Berkshire,” said Matthew Palazola, insurance analyst at Bloomberg Intelligence.
A Kiwoom representative declined to comment. Berkshire representatives did not respond to a message seeking comment.
Retail investors in South Korea have embraced some of the largest leveraged ETFs in the US. The Direxion Daily TSLA Bull 2X Shares, a single-stock ETF for Tesla shares, has raised $225 million from South Korean retail investors so far this year, increasing their total holdings in the ETF to $1.2 as of Nov. 8 billion, according to retention data.
While Kick BRK 2X Long Daily Target is said to be the first Berkshire single-stock ETF in the US, several others trade abroad. Yet they have failed to gain much of a following: Leverage Shares 2x Long Berkshire Hathaway ETP Securities, which trades on several European exchanges, only has about $2.3 million in assets.
Kiwoom’s new ETF would buy Berkshire Class B shares and then issue its own shares to investors, potentially at a much lower price than the $467.36 each Class B share sold for at market close on Monday. To increase its exposure to Berkshire’s daily returns, the ETF will enter into swaps with broker-dealers and also trade listed options on the Omaha, Nebraska, company’s B shares.
The Berkshire ETF would be a Kiwoom product that Tidal manages behind the scenes in exchange for a portion of the management fees.
‘Stained reputation’
Wall Street’s efforts to create an early version of a single-equity fund for Berkshire stock spurred Buffett to create the company’s Class B shares nearly three decades ago. At the time, Berkshire had just one share class trading at more than $30,000 per share, and ETFs were still 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 in advance and then holds the securities for a set period of time. He wrote that the trust would provide “easy and affordable access to Berkshire Hathaway common stock without the requirement to own entire shares.”
Berkshire threatened to bankrupt the trust by doing a stock split, setting up its own trust or creating a second share class, Katz said in an interview.
Buffett made good on this last threat by issuing Class B shares worth 1/30th of a Class A share. Investors flocked to the new stocks, making trusts like Katz’s redundant.
In a 1996 letter to shareholders, Buffett warned that such trusts were “fee-laden” vehicles that brokers would market “en masse to unsophisticated buyers” to earn large commissions. That would have saddled Berkshire with “both hundreds of thousands of unhappy, indirect owners (i.e. trustholders) and a tarnished reputation.”
Katz said he has no regrets: “How many guys do you know who are going up against Warren Buffett?”
–With help from Alexandre Rajbhandari and Sid Verma.
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