Buffett Beats ETFs

The Oracle of Omaha registered better annualized returns than two broad-based index ETFs over the past five years.
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NEW YORK (TheStreet) -- Warren Buffett's knack for making money has helped him attract millions of fans from around the world.

Among his followers are the authors and financial companies that have written books and dolled out millions in hopes of better understanding how this man's mind works. Given his track record against some of the most popular ETFs and mutual funds in existence, the investing world's attraction to this man is no surprise.

Buffett's ability to pick out undervalued companies and ride them to the top has helped him pocket huge profit for not only his own purse, but

Berkshire Hathaway's

(BRK.A) - Get Report

shareholders as well.

A little more than a month has gone by since a

Barron

's article put into perspective just how successful the Oracle of Omaha has been. In the piece, the author pitted Berkshire Hathaway's annualized returns since 1965 against every mutual fund in the same era. Funds falling into this category include

Fidelity Magellan Fund

(FMGAX) - Get Report

.

Over this timeframe, Berkshire had a 22% average annual return. This was enough to declare Buffett the clear winner. Fidelity Magellan, Buffett's closest mutual fund competitor, earned slightly more than 16% annualized.

While Buffett's performance against the mutual fund industry has been impressive, can the same be said about exchange traded funds?

Today, there are nearly 1000 exchange traded products available that provide investors with access to a wide range of market slices. These include not only broad indexes, but volatile sectors, subsectors, and individual countries. It would be unfair to compare a fund like the

iShares MSCI Brazil Index Fund

(EWZ) - Get Report

or the

Market Vectors Steel ETF

(SLX) - Get Report

to Berkshire.

Instead, in order to level the playing field, Berkshire's performance needs to be compared to an ETF that closely resembles Buffett's actual investment portfolio. This, however, can prove challenging. Although the ETF industry has become vast, there are no products designed to specifically mimic Buffett, and active ETFs are only beginning to roll out. For that reason, in order to choose the best fund to compare to Berkshire Hathaway, it is crucial to know exactly what is under this company's hood.

Buffett's investing conglomerate has a particular focus on well known, large-cap companies in sectors that include financials, energy, consumer staples and industrials. Given the portfolio's diversity, it seems suitable to pit the firm against another broad-based, large-cap ETF that boasts a strong collection of household names.

Unfortunately, the only funds coming close are broad index ETFs and dividend-oriented ETFs. Among those, most do not come close to matching Buffett's return. I narrowed the field to the

Rydex S&P Equal Weight ETF

(RSP) - Get Report

and the

iShares Dow Jones Select Dividend Index Fund

(DVY) - Get Report

.

The first true exchange traded fund,

SPDR S&P 500 ETF

(SPY) - Get Report

, was launched in 1993 and both DVY and RSP didn't make their appearance until ten years later. Therefore, in order to properly examine these funds against Berkshire, the timeframe must be cut down.

For the purposes of this examination, I compared the annualized returns of BRK.A to those of DVY and RSP over the past five years.

Berkshire Hathaway's annualized return since 1965 surpasses 20%. However, in looking at the returns over the shorter five-year window, the annualized return has dropped to slightly over 7%.

Seven percent is enough to easily beat DVY. Over the past five years, the fund's average annualized return is negative, with investors losing 0.40%.

The comparison between BRK and RSP is noticeably closer. However, once again, Buffett wins out. The equal weight ETF has seen a 5% annualized return over the past half decade versus Buffett's 7%.

Based on these findings, there isn't a a broad-based index ETF that has beaten Buffett. However, his lead has shrunk as Berkshire grows in size and becomes more like as index fund.

The question I have for readers is this: Do you think Buffett can keep up his streak over the next five years?

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion was long the iShares Dow Jones Select Dividend Index Fund.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.