One of South Korea’s leading retail brokerages, Kiwoom Securities, plans to package Berkshire Hathaway Inc. Class B shares. (BRK.B), in an exchange-traded fund (ETF), turbo-charged with financial derivatives.
According to an SEC filing, Kiwoom Securities partnered with US-based Tidal Investments to launch an ETF designed to provide 200% of the daily performance of Berkshire Hathaway Inc. by Warren Buffett.
Notably, individual stock ETFs like this one have become popular, using leverage that amplifies the potential returns and losses of high-profile companies like “Nvidia” and “Tesla.”
As a result, in South Korea, brokerage houses such as Toss Securities and Mirae Asset Securities have been trying to capitalize on the growing demand for US stocks amid the slow performance of stocks in the Asian country.
“Traditionally in leveraged ETFs, most of the interest and asset flow has been concentrated in the most volatile securities. However, Berkshire Hathaway is the polar opposite. Gavin Filmore, chief revenue officer at Tidal Investments, said in an interview.
It’s important to note that leveraged ETFs are generally intended for active traders who want to bet on the performance of a stock over a single day. This is because these types of funds tend to deviate from their course, when they follow stocks for a much longer period.
Because of this, using financial derivatives to boost Berkshire’s returns might not sit well with Warren Buffett, who in 2002 called them “financial weapons of mass destruction.” Additionally, it remains to be seen whether traders will take advantage of a stable stock like this, with this type of leveraged strategy.
A leveraged ETF on Berkshire Hathaway, a risky bet or a unique opportunity?
Notably, Warren Buffett is recognized as one of the best long-term investors and has advised people who own stocks to feel comfortable holding them for years.
On the other hand, Warren Buffett and his popular firm already have thousands of followers in South Korea. For reference, as of Nov. 8, individual investors in South Korea owned more than $800 million in Hathaway Inc “Class A” and “Class B” shares, according to data from the Korea Securities Depository.
Furthermore, according to Bloomberg Intelligence insurance analyst Matthew Palazola, Asian markets “have had a penchant for Berkshire” in recent months.
Currently, the “Berkshire Hathaway Inc Class B” (BRK.B) shares are trading at $466.29. Source: Yahoo Finance
It is important to note that Berkshire’s Class B shares are up 33% so far in 2024.
On the other hand, South Korean retail investors have also adopted some of the largest leveraged ETFs listed in the United States.
For example, the Direxion Daily TSLA Bull 2X Shares ETF, a single-share ETF for Tesla shares, has raised $225 million so far this year from South Korean retail investors, raising its total holdings. in the ETF to $1.2 billion as of November 8.
Additionally, although the Kick BRK 2X Long Daily Target ETF would be Berkshire’s first single-stock ETF in the United States, there are others listed abroad. However, even so, they have not managed to gain many followers, such as “Leverage Shares 2x Long Berkshire Hathaway ETP Securities”, which is listed on several European exchanges and has only $2.3 million in assets.
Hundreds of millions of dollars from South Korean investors flow to Warren Buffett
Notably, the new Kiwoom ETF would buy Berkshire “Class B” shares and then issue its own shares, possibly at a much lower price than at the market close. Additionally, to expand its exposure to Berkshire’s daily returns, the Kiwoom ETF will enter into swaps with broker-dealers and will also trade listed options on the Class B shares.
Additionally, the Berkshire ETF would be a Kiwoom product that Tidal will manage behind the scenes in exchange for a portion of management fees.
Importantly, Wall Street’s efforts to develop an early version of a single-share fund for Berkshire shares prompted Warren Buffett to create the company’s Class B shares nearly three decades ago. At the time, Berkshire only had one class of shares trading above $30,000, and ETFs were in their infancy.
For reference, in 1995, Philadelphia politician Sam Katz filed paperwork to create a mutual fund, a fund-like vehicle that purchases a fixed portfolio of stocks and bonds in advance and then holds the securities for a certain period.
According to Katz, the fund would provide “convenient and affordable access to Berkshire Hathaway common stock, without the requirement of owning full shares.”
However, Berkshire threatened to put the trust out of business through a stock split, creating its own trust and a second class of shares. Eventually, Buffett made good on that last threat by issuing Class B shares equal to 1/30 of a Class A share, and investors flocked to the new shares, rendering the Katz trust obsolete.
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