First Look ETF: Finding Value & Investing in Berkshire Hathaway's Portfolio with Income Potential

You are watching the March episode of First Look ETF.

I'm Stephanie Stanton with ETF Guide.

A very warm welcome to everyone.

It is great to have you with us.

Well, coming up on today's show, we will examine a new active ETF from BNY Investments that scour the US market for companies with attractive valuations and strong fundamentals.

Also, it is the very first actively managed ETF from Harris Oakmark.

We'll tell you how it works.

And finally, we'll dive into a new ETF from Vista Shares with a monthly income strategy on stocks that mirror the top holdings of Berkshire Hathaway.

But first, let's welcome Mal Leum with the New York Stock Exchange.

Mal, it is so great to see you again.

Great to see you as well.

All right, let's dive right into it with the latest update on ETF launch activity.

How's it looking?

Well, February proved to be another busy month with over 80 new launches, which is actually over double what was listed last February in 2024.

So, for those of us keeping track, that's over 150 funds listed this year alone, and it's inching us closer to 4,50 ETFs in the US, and we continue to see a strong pipeline as we head into the end of the first quarter.

Also, this past month, we saw a very monumental launch uh with the first ETF that provides retail investors exposure to public and private credit with the listing of Spiders Prime.

It's certainly exciting to still see new exciting development coming in the ETF rapper.

Yeah, absolutely.

You know, financial markets, they've gotten a lot more jittery.

Obviously, there's a lot more volatility these days.

How has that impacted ETF activity?

So, despite the heightened market volatility, we continue to see flows going to ETFs.

We saw over $110 billion in net asset flows in February.

There remains to be a lot of opportunity within ETFs even under these market conditions.

With more ETF solutions available than ever, there are many opportunities to manage risk and potentially ride out the storm.

This certainly puts a focus on the buffer ETFs that have gained a lot of popularity over the last few years.

Gold ETFs has also saw a big boost as investors seek safety among the selloff.

Sounds like some great options for nervous investors.

Um, we have a fantastic guest lineup today.

What are you looking forward to most about today's show?

You know, so today's show has a great lineup of NYC listed issuers.

We're excited to have Harris Oakmark, who recently entered the US ETF market, giving us access to their experienced team of investment managers with their debut of their first ETF.

We also have a brand new asset manager, Vista Shar, joining us today.

Although though the team is no stranger to ETFs, they are bringing new innovative investment solutions to the market.

And of course, we look forward to hearing from BNY Melon who recently added a new fund to their lineup at the NYSC.

It promises to be a great show.

It does.

So, let's get right to it.

Mal, thank you so much for the update.

Keep up the great work.

It's great to see you.

We'll see you soon.

You as well.

See you next month.

Thanks.

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So don't miss it.

Well, stock market volatility has certainly jumped and it is pushing stock prices lower.

It has also created a potential opportunity to find some bargains.

That is a focus of a new US large cap ETF from Harris Oakmark.

Here to tell us more is Robert Berig, partner portfolio manager with Harris Oakmark.

Hi Bobby, it is great to have you with us.

Hi Stephanie, great to be with you.

So before we talk about your firm's very first ETF launch, please familiarize our audience with Harris Oakmark and your firm's investing philosophy.

Well, at Harris Oakmark, uh we do only one thing, and that's value investing.

Our firm is based in Chicago.

Uh we've been in business since 1976.

Our goal is to provide clients with above average investment returns over the long term.

To do that, uh we take what I like to call a private equity approach to the public markets.

Our process is based on fundamental research and our philosophy has three core principles.

First, we look to buy stocks selling at a significant discount to our estimate of intrinsic value.

This gives us a margin of safety.

And that means the greater the discount that we get, the greater the potential return because there's more upside to fair value if we're right, and there's less downside if if we're wrong.

And next, we look for companies that we expect to grow per share value over the long term.

We want the combination of growth and yield to exceed the market.

Some people think one of the biggest risks to value investing is owning structurally disadvantaged businesses in a race against time.

But by looking for businesses that are growing in value, we try to avoid the risk that an extended time horizon could erode returns.

And then finally, uh we look for management teams that are aligned with shareholders.

Basically, we want the managers of companies in our portfolio to be good stewards of capital and do what's in the best interest of the owners of the business.

So, the Oakmark US large cap ETF and your ticker is OakM.

It is your first ETF launch.

So, first congrats on that.

Um, it is actively managed and it searches for undervalued stocks as you mentioned in the US large cap arena.

Um, tell us more about the screening process. give us a deeper dive into that and then what types of companies we might expect to see inside the portfolio.

Yeah, well, we launched the Oakm ETF this past December and it's managed by the same threeperson team that manages the Oakmark Mutual fund.

We use the same value investing philosophy that uh we do in our other US large cap equity strategies.

In Oak, we typically hold 30 to 40 large cap US companies, which makes it a little more concentrated than our main mutual fund. um it's it's unconstrained by sector and we construct the portfolio so that our largest positions are our best ideas.

As for kind of how we generate those ideas, we have a team of uh a little more than a dozen generalist analysts who search for new ideas across industry groups.

It's all done through fundamental research.

And I I would call the the sourcing process uh eclectic in that an idea could come from anywhere. could be a uh from a quantitative screen, could be a business we've analyzed a few years ago, but the price has only recently become attractive.

Um or it could be a company that that came up in the course of researching a competitor.

Really, I think the the the key point is we don't really care where the idea comes from as long as it's a good idea that's practical for us to buy.

And today, uh we think the opportunity set is greatest in what I'd call traditional value stocks.

So you can think about companies with low price to earnings and low price to book value ratios.

You take the S&P 500 today, it's become very concentrated in in megga cap growth companies primarily in the technology sector.

Um but we're overweight areas like financials and and and energy.

We think banks like Croup that sells for nine times earnings or insurance companies like AIG that sells for 11 times earnings are cheap.

If both of those companies are returning significant capital to shareholders through repurchases and dividends and it it would be a similar story uh with like the ENTP companies where we we would own stocks like Econical Phillips that that has a double-digit free cash flow yield.

It's still growing production and it's also paying a dividend and buying back stock.

We're underweight the information technology sector today because it sells it at a really high premium and you know we we have owned plenty of companies in that sector in the past and and we would expect to own them again in the future if prices uh were to become more attractive.

As an example, if you look back in in 2022, we bought companies like Salesforce, Oracle, and Adobe uh in our large cap strategy when their prices fell. um we sold them when they reached our estimate of intrinsic value uh after strong runs in in 2023 and 2024.

I think really the takeaway is it it's crucial to have a flexible approach because the opportunity set is always changing and at Harris Oakmark we're just never going to compromise on valuation.

We we won't put our clients capital at risk unless uh we think that we're buying stocks for less than they're worth and and that flexibility is key as you mentioned that makes a lot of sense.

So, how do you see financial adviserss and investors potentially using Oakm inside a diversified portfolio?

Well, we we've offered our US large cap strategy for many years through mutual funds, through separately managed accounts and and model delivery.

And if you look at the Oakmark fund, it it has outperformed both the S&P 500 and the the Russell 1000 value indexes since its inception in 1991. uh like the Oakmark fund, the the Oakm ETF is is really designed for someone who is looking to invest uh for the long term in a diversified portfolio of of US stocks.

I'd say that the time horizon should really be like 5 years or longer.

And uh you know, for that reason, we view it as appropriate for a foundational equity investment, maybe saving for college or retirement. uh or it could could also be used as the value component of a of a broader asset allocation program with with OKM.

What what we're really doing is making our value strategy available to clients who prefer the prefer the convenience of an ETF.

Um because that's a vehicle that it brings kind of the benefits of transparency and intraday liquidity as well as the tax efficiency that we're known for delivering in our funds.

And so we're excited to uh to offer it as part of the Oakmark lineup.

Got it, Bobby.

Thank you so much for joining us here on First Look ETF and sharing more about OakM.

And again, congratulations to you.

Thank you, Stephanie.

Financial markets are dynamic and constantly changing.

Well, instead of being flatfooted, it is crucial that investors and advisers take advantage of those changes.

One potential aid is a new active ETF from BNY Investments.

Now, the fund's goal is to find companies with attractive valuations and strong fundamentals.

Well, here to tell us more is Brian Ferguson, senior portfolio manager with Newton Investment Management.

Hi, Brian.

It's great to have you with us.

Hello, Stephanie.

So, before we discuss the BNY Melon Dynamic Value ETF, and that ticker is BKDV.

What are some of the challenges facing US equity investors at this critical moment?

Well, I'll tell you where where do we start?

I mean, there are so many challenges that this must be a two-hour show if we're going to cover everything, but those challenges are are music to the ears of active managers and especially value managers.

So, I've been doing this for over 30 years.

I've never seen the future or what we see through the windshield look so different than what we see through the rear view mirror or the past.

And when the past looks like the future, that's great for passive, right? market cap weighted indices, what did well in the past, bigger weight, and just a positive feedback loop of doing well.

And we were in that regime for about a decade post the great financial crisis.

And then it all changed with 2020.

So now we've got uh new policies.

We've got a a new interest rate regime.

Say goodbye to the lower lows and lower highs and zer zero interest rates. and say hello to higher highs and higher higher lows, right?

And higher cost of capital.

And then you know what?

Let's let's put the uh the cherry on the top here.

The pace and rate of disruption is maddening.

Whether we're talking AI, whether we're talking innovation from healthcare, think about GLP1s, the weight loss drugs, what that's doing for health care companies, some good, some bad. what it's doing for staples companies.

So that creates huge dispersions and that is awesome for active managers that believe in what they do and how they do it time- tested with a 10-year team.

We believe we have that.

We love this opportunity to generate alpha by being overweight companies on the on the good end of that dispersion and underweight companies on the bad end.

So what a great time.

The other thing too, if you want a couple bumper stickers, the first is there has never been more value and value.

Value's underperformed for 12 and a half of the last 15 years. 150 years of market history, this is why I'm a value manager.

It outperforms two out of three years.

I'll take 150 over 15 years. 0.1 point 2 because of that dispersion and the change that we've talked about, there's never been more value traps in the market and not just in value stocks everywhere.

And that gets to this great backdrop for being value and being active.

Yeah.

I mean, and the key is finding those values.

So, your firm's new dynamic value ETF, and that ticker again is BKDV.

Um, it was recently added to your ETF lineup.

So, tell us more about its investment approach and then are there any equity names that we might recognize?

Yeah, absolutely.

So, you know, thanks for this opportunity.

Yes, we we did launch the active uh ETF uh at the back end of last year.

Uh the assets and the strategy I believe are around 180 million.

Uh but this is the same portfolio of uh dynamic value of which we have uh a mutual fund and then of course institutional accounts.

The strategies assets uh are right around 12.5 uh billion dollars.

And um you know I always like to look at well what are the differentiators right because everybody's going to talk to you and they're going to say listen we've got the best people process philosophy portfolio performance and you know we'll say that too there it is bam we got the best of that but what differentiates a given manager and for us it's four-fold the first is the long tenure team so September marked the 21st anniversary where I've been entrusted with the stewardship of this portfolio.

IO with John Baylor as my backup for all the 21 years.

That means a lot because when you look at past performance and it's being brought to you by the people bringing you today's performance and tomorrow's performance, that means a lot as it should.

Point two, the dedicated portfolio team.

We don't do it alone.

At Newton, we have over 65 investment professionals that we collaborate with to get the job done.

Standard industry analysts, but also differentiated resources.

We have a group, they're called the investigative research group.

They've never covered a stock, never will.

They're investigative journalists by trade.

They can do things that analysts can't do or can't do as well.

The third is, and this is very important, we start with value, but we don't stop with value.

So, we're not a deep value manager.

We start with value.

We balance it with an analysis of the fundamentals.

Think about balance sheet liquidity.

We want that to be good or improving so you can get through tough times.

Tough times happen all the time.

Probably far too often.

Think about the great financial crisis.

Think about 2011 with the uh European fiasco fiasco and uh debt downgrade and then 2020 with the pandemic.

Uh and then thirdly, the third leg to the investment philosophy is that catalyst driven business improvement.

And especially in this age of dispersion and change that we talked about earlier, the value traps are all over the place.

And so the anchor to the winward that we have on the trifecta and especially that third leg to the investment stool catalyst driven business improvement holding each stock and investment case to that integrity helps us avoid the value trap or the risk of being uh too early that you just got to call it being wrong.

And then the fourth thing is the commitment to style purity.

So when you buy our portfolio, the BNY US large cap dynamic portfolio, you're going to get all those things every day.

And I'll tell you, remember the 15 years where what growth outperformed for 12 and a half of the 15, a lot of value managers couldn't take it anymore.

And so, you know, putting it nicely, they drifted in the pursuit of alpha, right, to more growth.

That may work for them, doesn't work for us.

You know why?

Because our clients, it's very important in the confines of their asset allocation that we perpetually represent that bastion of US large cap value.

It's important to them, therefore important to us.

Absolutely.

And you know, especially in such a tenuous time, a lot of people are in fear.

Um, it's great to have your energy and your positivity.

I mean, I think that goes a long way as well.

So, um, okay.

So, how might advisers and investors deploy the BNY Melon dynamic value ETF inside a diversified portfolio?

For us, the active ETF is just another packaging of our strategy.

And as you well know, uh, for many investors, the ETF is just a preferred package.

It provides the daily liquidity and there's enhanced uh tax efficiency for those taxable clients.

We also have the mutual fund.

We have separate accounts uh pulled fund uh and it's really up to the individual client to determine what is the best packaging of what we do dynamic large cap value that is most appropriate for them. as it relates to the value.

Well, the value and value is here right now.

So, after so many years of underperforming, you know, we really believe it's a great time for value.

I think as a individual or a corporation's overall asset allocation uh having an allocation towards value uh always adds value and I would make the case that uh it's even more important and can add even more value and more diversification now because you know what this market you know up until recently has been at all-time highs but there's really two markets in the market it's kind of the magnificent seven and then there's the other 493 stocks that are out there and there's a big sucking sound of capital that came from the 493 and went into seven.

I've never seen this kind of crowding.

So, it's a great time to have managers that aren't going to drift and aren't going to cheat and are going to focus on the opportunities, the opportunities that have been left behind.

So, our portfolio trades at about 14 times forward earnings and about two times book.

The market trades at about 22 times forward earnings and five times book.

So we have seen this movie before, right?

I've been doing this a long time.

Remember the tech bubble 99200 in March of 2000 when the tech bubble peaked and almost to the day it was the day that Julian Robertson said I'm returning the money because he couldn't take it anymore cuz 12% free cash flow yields went to 14.

He said been doing this a long time, made a lot of money.

I don't need that.

Almost from the day that he returned it is when the NASDAQ bubble peaked.

So, let's fast forward what happened after that.

A year out, the S&P was down a little over 20%.

Wow.

Okay, that's that's correction territory.

The equal weighted S&P was positive 3%.

So fast forward to today, the crowding that we have today is infinitely bigger than the crowding we had back then.

We have seen this movie before.

Great time to focus and have managers focus on those stocks that investors have not focused on yet, but maybe they're just starting to.

It is a fascinating analysis and who can turn down a good value.

Brian, thank you so much.

It has been a pleasure having you today.

Thank you.

With the potential for lower stock market returns ahead, some investors are focused on how to generate both higher and consistent income for their portfolios.

Well, a new ETF from Vista Shares uses a monthly income strategy on stocks that mirror the top holdings of Birkshire Hathaway.

So, how does it work?

Here to explain is Adam Patty, CEO of Vista Shares.

Adam, it is great to have you here on First Look ETF.

Oh, thanks for having me.

I appreciate it.

Yeah.

So, this sounds like such an interesting concept, but before we dive into your firm's latest ETF launch.

Tell our audience a little bit more about Vista Shares and your firm's unique investment philosophy and approach.

Sure.

You know, I I as you may know, I've been in the ETF market for a long time.

My last company, I focused on liquid alternative strategies and always looking to do something innovative that hopefully brings value to advisers.

So, Vista Shares is a uh a partnership between myself and a gentleman named John McNeel who is the president of Tesla and he runs a venture studio called DVX Ventures.

So, what we're looking to do is really bring out products that are extremely welldesigned.

They're researched and they hopefully fill gaps in the market for advisers to add value for their clients and their portfolios.

It it's it's very simple.

Um but it, you know, takes a lot of work and we're trying really hard to bring out um products that mean something to people.

Yeah.

So, the Vista Shares Target 15 Berkshire Select Income ETF and that ticker is OM Ah Omaha.

I like what you did there.

Um, this recently joined your firm's ETF lineup.

So, congrats on that.

Tell us more about the fund's income strategy along with what types of companies it owns.

Sure.

I mean well it's very simple strategy frankly and given today's uh volatility or the volatility that we've been experiencing over the last you know really couple six weeks or so uh we think that the strategy is is time is now so we all know what an incredible investor Warren Buffett is I mean no one I don't need to talk about that we all know that so uh what Omaha is all about is in investing like Warren Buffett but with income so what we've simply done there is we have created an equity portfolio comprised of BR RKB uh Birkshire Hathaway um and it's top 20 holdings.

So top 20 holdings of course being you know the Coca-Cas, the City Groups, the Apples, you know, in the same proportions that Birkshshire Hathway would would own them themselves.

Um so it's 21 equity holdings and then we simply apply a an options overlay to generate a target 15% annual income uh which we pay out monthly uh 1 and a quarter% monthly.

Yeah, I mean it sounds so simple. give us some examples um of what types of companies we might expect to see inside this fund.

Sure.

So um exactly what you find in um Bergkshire Hathaway.

So you've got Apple, we've got Cityroup, we've got Visa, American Express, uh Bank of America, VeraSign, Kroger, um I'm trying to think of the others other than in the top 10 off the top of my head.

Uh Dvidita.

So um it's it's it's the companies you would expect to own.

These are blue chip companies that Warren Buffett of course has chosen to be uh significant holdings in his own fund in in in within Berkshire Hathaway.

Um so certainly um you know we believe they have legs.

U we think it's a very well- diversified portfolio um that's particularly suited I think for today's environment.

Um we do have some growth stocks in there but it's you know I guess Bergkshire you would consider more of a value play going you know over time um in terms of their tilts.

So um we think it's timely.

It certainly is.

I feel like there could be a hashtag like # where's Warren or some kind of clever I'm seeing some clever marketing here.

Okay.

So, you know, um how do you see then this ETF um being potentially used by financial advisors and investors?

I mean, certainly you're looking to attract fans of of Warren Buffett.

Well, sure.

So, I think there's two major use cases which is interesting and there, you know, you don't even need to really try too hard to try to determine if they make sense or not. one is obviously um as a portion of your core equity allocation.

You know, if you're you know, whatever your allocation is to equity, you you carve some of this off and you're getting a nice diversified portfolio of equities uh similar to Birkshire Hathaway uh but with the added addition of the income stream which uh particularly maybe might be more even more interesting to investors now.

But I what I also think is very powerful is that Birkshire Hathaway does not pay a dividend.

So for all those investors out there that are invested in Birkshire Hathway, um you know, carve off a little of your BRKB holding um add a little of this and create a synthetic dividend for your for your core Birkshshire Hathaway holdings.

I mean, it's a very elegant solution, I think, to generate income off of really what's almost identical exposure uh at least in the top 20 holdings.

Adam Patty, thank you so much for sharing more about your ETF.

It is always a pleasure to have you here on First Look ETF.

Thanks for having me.

And that does it for today's episode of First Look ETF.

If you enjoyed the show, tell us in the comments section below and by hitting the like button.

A big thanks to all of our guests along with malleum at the New York Stock Exchange.

Be sure to check out ETF Central.com to learn more about that.

In the meantime, I'm Stephanie Stanton with ETFU.

Thank you so much for watching.

We will see you next time.