(Bloomberg) — Warren Buffett created Class B shares of Berkshire Hathaway nearly 30 years ago to thwart money managers who sought to split the group’s pricey shares.
Most read from Bloomberg
One of South Korea’s largest retail brokerages now plans to consolidate Class B shares into an exchange-traded fund stocked with derivatives, another move Buffett may not like.
Kiwoom Securities has teamed up with Milwaukee-based Tidal Investments to form an ETF designed to provide 200% of Berkshire’s daily performance, according to a regulatory filing.
Single-stock ETFs like these have been sweeping the fund world, using leverage that increases the potential returns — and losses — of big companies like Nvidia Corp. And Tesla Inc. In South Korea, brokerage firms such as Toss Securities and Mirae. Asset Securities seeks to benefit from the growing demand for US stocks amid the sluggish performance of local stocks.
“Traditionally in leveraged ETFs, the lion’s share of interest and asset flow has been in the more volatile names,” Gavin Fillmore, chief revenue officer at Tidal, said in an interview. “Berkshire is almost the polar opposite.”
Leveraged ETFs are often intended for active traders who want to bet on a stock’s performance for no more than a day, as these funds typically go awry when tracking stocks over a longer period. Using derivatives to exploit Berkshire’s returns may not sit well with Buffett, who once described them as “financial weapons of mass destruction.”
While Buffett’s company is a well-known name, it remains to be seen whether day traders will have an appetite for riding consistent stocks like this one with this type of leverage strategy. Buffett is known as a long-term investor who advises people to own stocks that they will be comfortable holding for years.
Buffett, 94, and his company already have a following in South Korea. As of Nov. 8, individual investors in South Korea owned more than $800 million worth of Berkshire Class A and Class B shares, according to data compiled by the Korea Securities Depository.
Asian markets “have a bias for Berkshire,” said Matthew Palazola, an insurance analyst at Bloomberg Intelligence.
A representative for Kiwoom declined to comment. Representatives for Berkshire did not respond to a message seeking comment.
Retail investors in South Korea have embraced some of the largest U.S.-listed leveraged ETFs. Direxion Daily TSLA Bull 2X Shares, an ETF for Tesla stock, has taken in $225 million so far this year from retail investors in South Korea, bringing their total stake in the ETF to $1.2 billion as of Nov. 8, according to For deposit information.
While the Kick BRK 2X Long Daily Target, as it’s known, will be Berkshire’s first single-stock ETF in the U.S., several others trade overseas. However, they failed to capture much of the following: 2x Equity Leverage Long Berkshire Hathaway ETP Securities, which trades on several European exchanges, only has assets of about $2.3 million.
Kiwoom’s new ETF will buy Berkshire Class B shares and then issue its own shares to investors, likely at a much lower price than the $467.36 at which each share of Class B shares was sold as of market close on Monday. To amplify its exposure to Berkshire’s daily returns, the ETF will enter into swaps with broker-dealers as well as trade listed options on shares of the Omaha, Nebraska B.C.
The Berkshire ETF will be a Kiwoom product managed by Tidal behind the scenes for a portion of the management fee.
‘Tainted reputation’
Wall Street’s efforts to create an early version of a single-stock fund for Berkshire stocks prompted Buffett to create the company’s Class B shares nearly three decades ago. At the time, Berkshire only had one class of stock trading at more than $30,000 a share, and ETFs were in their infancy.
In 1995, Philadelphia politician Sam Katz filed papers to create a unit mutual fund, a fund-like vehicle that buys a fixed portfolio of stocks and bonds up front and then holds the securities for a specified period. The fund will provide “convenient, affordable access to Berkshire Hathaway common stock without having to own the full shares,” he wrote.
Berkshire threatened to put the trust out of business by splitting shares, creating its own fund or creating a second class of shares, Katz said in an interview.
Buffett successfully responded to this latest threat by issuing Class B stock equal to 1/30 of Class A stock. Investors flocked to new stocks, making credit funds like Katz’s obsolete.
In a 1996 letter to shareholders, Buffett warned that such trusts were “overwhelmed” vehicles that brokers marketed “en masse to unsophisticated buyers” in order to earn large commissions. This would have burdened Berkshire with “hundreds of thousands of unhappy and indirect owners and a tarnished reputation.”
Katz said he had no regrets: “How many people do you know who would pick a fight with Warren Buffett?”
–With assistance from Alexander Rajbhandari and Sid Verma.
Most read from Bloomberg Businessweek
©2024 Bloomberg L.P