Should You Tap High-Yield Bond ETFs, Following Warren Buffett?

Warren Buffett, known as the "Oracle of Omaha," recently sold a portion of Berkshire Hathaway's (BRK.A) holdings in Bank of America BAC. Previously, Bank of America was Berkshire’s second-largest position after Apple AAPL, but Buffett has reduced his stake.

Buffett sold over $9.6 billion worth of Bank of America stock during the third quarter and an additional $140 million in the first two days of October, per a Motley Fool article, as quoted on Yahoo Finance. In fact, Buffett's been a net seller of stocks for seven consecutive quarters beginning with Q4 of 2022.

Reducing Other Key Holdings

Bank of America isn't the only company Buffett has trimmed from Berkshire’s portfolio. In the past, Buffett sold over half of Berkshire's position in Apple, though the tech giant still remains the firm's largest holding.

Two key factors seem to be driving Buffett's decision to sell large portions of Berkshire’s stock holdings: likelihood of tax changes and stock valuations. Buffett probably anticipates that corporate tax rates will increase once the current tax laws expire in 2025. Plus, many of the stocks he's selling are trading near or above their intrinsic value.

Buffett’s Preferred Investment: U.S. Treasury Bills

Buffett has been buying heavily into U.S. Treasury bills, a trend that has accelerated over the past two years. As of the end of Q2 of 2024, Berkshire held $238.7 billion in short-term U.S. Treasury bills, plus an additional $38.2 billion in cash, bringing the total to $276.9 billion — up from $109 billion at the end of Q3 of 2022.

Buffett favors short-term Treasury bonds for their safety and protection against interest rate risk. Over the past two years, short-term bonds have been yielding higher than long-term ones due to a hawkish Fed.

As of Oct. 7, 2024, the one-year U.S. treasury bond yield stood at 4.24% versus 4.03% offered by the 10-year U.S. treasury bond yield. Hence, short-term Treasury bills could serve as a good temporary investment options.

Why Buying Cash-Like ETFs Makes Sense Now

The road ahead in the investing world is a bit unclear. Although the stock market remained at a lofty level, overvaluation concerns remain. The Fed may not move fast on the policy easing due to the ongoing economic resilience. Plus, we’ll have presidential election this year, which may cause quite an uncertainty.

Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given short-term bonds are yielding higher. Below we highlight a few money-market ETFs and their performance plus yields.

ETFs in Focus

Federated Hermes Short Duration High Yield ETF FHYS – Yield 6.48% annually

This ETF is active and does not track a benchmark. The Federated Hermes Short Duration High Yield ETF seeks to provide high current income with at least 80% of its assets in fixed income securities rated below investment grade. The fund charges 51 bps in fees.

Fidelity Low Duration Bond Factor ETF FLDR – Yield 5.60% annually

The underlying Fidelity Low Duration Investment Grade Factor Index is designed to optimize the balance of interest rate risk and credit risk such that both returns and risk measures may be improved relative to traditional U.S. investment grade floating rate note indices. The ETF FLDR charges 15 bps in fees.

Invesco Ultra Short Duration ETF GSY – Yield 4.35% annually

This ETF is active and does not track a benchmark. The Invesco Ultra Short Duration ETF is an actively managed exchange-traded fund that seeks to provide returns in excess of cash equivalents while also seeking to provide preservation of capital and daily liquidity. The fund charges 23 bps in fees.

Fidelity Sustainable Low Duration Bond ETF FSLD – Yield 5.31% annually

This ETF is active and does not track a benchmark. The Fidelity Sustainable Low Duration Bond ETF seeks to obtain a high level of current income consistent with preservation of capital. The fund charges 20 bps in fees.

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