ETFs Stick to Buffett's Buy-Hold Strategy

NEW YORK (TheStreet) -- This week, two of Berkshire Hathaway's (BRK.A) largest holdings, Coca-Cola (KO) and Wells Fargo (WFC)), lived up to Warren Buffett's expectations, releasing strong earnings reports that beat analyst expectations. The financier has held stock in both KO and WFC since the late 1980s.

Warren Buffett is both a diehard proponent and major beneficiary of the buy-and-hold investing strategy. Although not as exciting or fast paced as trading, Buffett's ability to pick out and buy companies such as Coca-Cola, Wells Fargo, and American Express ( AXP) on the cheap and allow them to increase in value over years and decades has been essential to the creation of his $40 billion fortune.

Buffett has explained in the past that his favorite time period for holding shares of a company is "forever." Living up to this creed, when the investor purchased Burlington Northern Santa Fe Railroad in late 2009, he explained that the deal would provide Berkshire Hathaway ( BRK.A) with stable returns for 100 years.

Although this technique has paid off for the Oracle of Omaha, critics of buy and hold often point to the fact that the famous financier took advantage of this method during a time that was very unlike the one we live in now. In today's volatile global marketplace, opponents feel that investors can no longer buy shares of a company, sit back, and watch those shares grow in value.

To that critique I note that, with the introduction of ETFs, the buy-and-hold method has been able to evolve over the years to accommodate these changes to both the investing landscape and the retail investor mindset.

With the exception of leveraged ETFs, which are designed to be held for short periods of time by market professionals and day traders, the recent dramatic growth of the exchange traded fund industry was fueled in large part by funds designed to be bought and held for the long run, rather than traded in and out of quickly.

The growing field of active and pseudo active funds, such as First Trust's line of AlphaDex funds and PowerShares' Dynamic suite of products, employs an active manager or a "smart" indexing strategy to screen for outperforming companies and sectors, allowing investors to put their money into a fund and over time watch that money grow.

Others funds such as iShares Dow Jones Select Dividend Index Fund ( DVY) seek to provide investors with a consistent yield that is paid out over the course of the year.

Additionally, a number of fund companies have taken to introducing target-date fixed income products structured to be held until a designated time period.

Although ETFs are generally designed for long-term investing, they also boast a number of specific traits that make them attractive for today's well-educated and heavily involved investor.

Thanks to the internet and main stream media, investors are constantly bombarded with a staggering amount of information each day. With all of this data and news, staying on top of every day market action has become an easy task, and investors have become increasingly involved in the development of their personal investing portfolios.

Because ETFs trade throughout the day similar to stocks, investors have the ability to move quickly and freely in and out of holdings to avoid risky areas of the market. Additionally, investors can easily access a fund's index from the respective fund provider's Website. This way, it is easy to keep up to date with current positions and changes in their portfolio.

Although economic headwinds facing Europe and China have stirred fears in the hearts of investors around the world, I still believe we are in the midst of a global economic recovery. The path ahead will not be as smooth as we may like, but I'm confident that strength will prevail.

Given this outlook, like Buffett, I will continue to rely on traditional, albeit constantly evolving long-term, buy-and-hold investing strategies when designing portfolios to build wealth for both newsletter subscribers and money management clients.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was long 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.

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