Can leveraged ETFs follow Buffett? South Korean brokerage "boldly" plans to package Berkshire (BRK)

According to the Zhitong Finance APP, one of South Korea's largest retail brokerages is currently planning to package Berkshire Hathaway Class B shares (BRK.B.US) into an exchange-traded fund (ETF) that amplifies returns through derivatives, but this may not be an action favored by Buffett. A regulatory document shows that Kiwoom Securities Co. has partnered with Milwaukee-based Tidal Investments to establish an ETF aimed at providing double the daily performance of Berkshire.

Nearly 30 years ago, Warren Buffett established Berkshire Hathaway's Class B shares to prevent fund managers from attempting to split the shares of this high-priced conglomerate.

Such single-stock ETFs have swept through the fund industry, leveraging potential returns and losses of companies like NVIDIA (NVDA.US) and Tesla (TSLA.US). In South Korea, brokerages like Toss Securities and Mirae Asset Securities have been seeking to profit from the growing demand for U.S. stocks amid a sluggish performance in the Korean stock market.

Gavin Filmore, Chief Revenue Officer of Tidal, stated in an interview, "Traditionally, most interest and asset flows in leveraged ETFs are concentrated in more volatile ETFs. Berkshire is almost the complete opposite."

Leveraged ETFs are typically designed for active traders who wish to bet on a stock's performance for no more than a day, as these funds often deviate from their trajectory when tracking stocks over longer periods. However, Buffett may not appreciate the use of derivatives to enhance Berkshire's returns, as he has referred to them as "weapons of mass financial destruction."

While Buffett's company has a strong reputation, it remains to be seen whether short-term traders will be interested in using this leveraged strategy to navigate such a stable stock. Buffett is known as the ultimate long-term investor and has consistently advised people to hold stocks that can be safely held for many years.

The 94-year-old Buffett and his company have already garnered a following in South Korea. According to data compiled by the Korea Securities Depository, as of November 8, individual investors in South Korea held over $800 million worth of Berkshire Class A and B shares.

Matthew Palazola, an insurance industry analyst at Bloomberg Intelligence, stated that the Asian market "has a favorable view of Berkshire."

A representative from Kiwoom declined to comment. Berkshire's representatives did not respond to requests for comment.

South Korean retail investors have embraced some large leveraged ETFs listed in the U.S. Custody data shows that year-to-date, the single-stock ETF targeting Tesla shares—the Direxion Daily TSLA Bull 2X Shares—has attracted $225 million in investments from South Korean retail investors, and as of November 8, the total holdings of this ETF have reached $1.2 billion Kick BRK 2X Long Daily Target will be Berkshire Hathaway's first single-stock ETF in the United States, with several other ETFs also trading overseas. Nevertheless, these ETFs have not gained much traction: the Leverage Shares 2x Long Berkshire Hathaway ETP trades on several European exchanges but has only attracted about $2.3 million in assets.

Kiwoom's new ETF will purchase Berkshire Class B shares and subsequently issue its own shares to investors, which may be priced significantly below the Class B share price of $467.36 at Monday's close. To expand exposure to Berkshire's daily returns, this ETF will enter into swap agreements with brokerage firms and trade listed options on Berkshire Class B shares. The Berkshire Hathaway ETF will be a product of Kiwoom, operated behind the scenes by Tidal in exchange for a portion of the management fees.

A Tarnished Reputation

Wall Street's creation of early single-stock funds for Berkshire shares prompted Buffett to create the company's Class B shares nearly 30 years ago. At that time, Berkshire's only class of stock was trading above $30,000 per share, while ETFs were still in their infancy.

In 1995, Philadelphia politician Sam Katz submitted documents to create a unit investment trust, a fund-like vehicle that could pre-purchase a fixed portfolio of stocks and bonds and hold those securities over a period of time. He wrote that the trust would provide "convenient and affordable Berkshire Hathaway common stock without the need to own a full share."

Katz stated in an interview that Berkshire threatened to bankrupt the trust through a stock split, establishing its own trust, or creating a second class of stock. Buffett followed through on the last threat, issuing Class B shares equivalent to 1/30 of Class A shares. Investors flocked to the new stock, rendering Katz's type of trust obsolete.

In a letter to shareholders in 1996, Buffett warned that such trusts were "costly" tools that brokers would "heavily market to unsophisticated buyers" to earn high commissions. This would burden Berkshire with "hundreds of thousands of dissatisfied indirect owners (i.e., trust holders) and a damaged reputation."

Katz said he had no regrets: "How many people do you know have the chance to go head-to-head with Warren Buffett?"