Buffett No Choo-Choo for Railroads

While Professor Buffett and Berkshire Hathaway(BRK.A) have made some big bets in the past, none has been larger than the massive $34 billion investment he made in Burlington Northern Santa Fe(BNI) earlier this year.

Buffett has claimed that his buy was a strong bet on the future of the U.S. economy as well as a stable investment for the long term future of Berkshire Hathaway. However, this has not stopped others, including myself, from looking deeper.

In the month since he made his bet, debate among analysts has raged about Buffett's motives for placing the wager, the future of Berkshire Hathaway and the implications of Buffett's actions on the rest of the economy.

One of the more public debates has been whether or not his actions taken with BNI would lead to a bubble in the railroad industry as a whole.

Looking at the data from an ETF perspective, there is no evidence of a bubble in the railroad industry.

On Nov. 3, the day deal was announced; the iShares Dow Jones U.S. Transports Index (IYT) ETF saw an impressive jump. The ETF, designed to track the Dow Jones Transportation Index, held BNI as its largest holding even before the deal. It currently makes up 13.19% of its total portfolio. The initial optimism ended up being short-lived though. Since that day, the fund has returned to normal performance.

In fact, compared to broader indices, IYT has underperformed. From Nov. 3 through Dec. 1, the fund has gained under 6%. The Dow Diamonds Trust(DIA) ETF, on the other hand, has gained almost 7.5% in the same period.

Digging into the sector, the railroad-heavy transportation index has not only lagged the broad DIA index, but many alternative transportation indices as well. For instance, from Nov. 3 to Dec. 1, the Claymore/Delta Global Shipping Index(SEA) ETF has gained 8.21%, and the Claymore/Arca Airline Index(FAA) ETF has gained over 15.5%.

Had Buffett's Burlington Northern buy triggered the start of a bubble in the railroad industry, IYT would have shown considerably stronger performance compared to the broad DIA in the period since the deal was made official. Additionally, a bubble in the railroad sector would have caused the IYT, with 31.61% weighting in railroads, to crush other funds focused on alternative, non-railroad, slices of the transportation industry.

When Buffett initially commented on his railroad purchase, he assured investors and analysts that, unlike other plays like BYD, this was not a bet that he expected staggering returns from. On the contrary, he saw Burlington Northern as a long-term play for Berkshire Hathaway that would bring with it steady, albeit, slow returns throughout. Over the past month, this has proven true.

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