ETF Strategies to Follow From Buffett's Defensive Stance

Legendary investor Warren Buffett has been taking a cautious approach to money management. The 94-year-old CEO of Berkshire Hathaway (BRK.B) has been selling more stocks while amassing a record-breaking cash reserve of $334 billion. Now, the question is whether Buffet bracing for potential market turbulence. Let’s delve a little deeper.

Stock Sales and Cash Hoarding

Despite Buffett’s reputation for strategic stock purchases, Berkshire has been a net seller of equities for nine successive quarters. The company offloaded over $134 billion in stocks throughout 2024, primarily reducing its stakes in Apple and Bank of America. This has raised concerns among investors, particularly as interest rates are expected to decline.

However, despite an astounding cash holding, Buffett does have a preference for equities. The majority of the money is still in equities.

Lack of Stock Buybacks by Berkshire

In addition to selling stocks, Berkshire has halted share repurchases. No shares were bought back in the fourth quarter of 2023 or the first quarter of 2024 (through Feb. 10), even as the company reported an increase in operating earnings.

Note that Berkshire shares have performed well in recent times, rising 25% in 2023 and 16% in 2024, with a 5% increase so far this year. Shares of Berkshire Hathaway currently trades at a P/E (TTM) of 24.97X compared with a negative 26.77X P/E recorded by the Insurance - Property and Casualty industry.

Why the Caution?

Buffett’s decision probably came after the S&P 500 gained more than 20% in each of the past two years, which may trigger overvaluation fears. Moreover, there are recent market cracks, thanks to concerns over economic slowdown, policy shifts under President Donald Trump and renewed inflation fears.

ETF Strategies to Learn From

Against this backdrop, below we highlight a few exchange-traded fund (ETF) strategies that Buffett’s style is indicative of. 

Bet Big on Japan

While Buffett remains cautious about the U.S. market, he indicated that Berkshire will continue increasing its stake in five major Japanese trading houses, an investment strategy he initiated nearly six years ago. iShares MSCI Japan ETF EWJ should be a good play in this regard.

Quality ETFs to Brace for?

Shareholders are probably in two minds. Some see Buffett’s cautious approach as indicative of a broader market concern, while others view it as a strategic transition for Berkshire’s future. Still, with tariff tantrum going around and economic slowdown being a likely fallout, investors can tap quality ETFs like WisdomTree U.S. Quality Dividend Growth ETF DGRW.

Undervalued Market ETFs to Play?

Is Buffett sensing overvaluation in the market? He is not buying back even his own company’s shares. Should investors shift away to undervalued markets like Europe and China?Since late 2022, global stocks have surged over 60%, thanks to the optimism around artificial intelligence (AI) and the belief that the U.S. recession has been averted (read: Investor Sentiment at 15-Year High: ETFs in Focus).

Initially driven by a handful of U.S. technology stocks, the rally is now broadening out as investors shift toward undervalued European equities. Vanguard European Stock Index Fund ETF VGK is up more than 10% this year while the SPDR S&P 500 ETF Trust SPY has gained about 2.6%.

And we all know that Chinese stocks have been soaring lately on the DeepSeek buzz and hopes for policy stimulus. This makes the likes ofKraneShares CSI China Internet ETF (KWEB) and iShares China Large-Cap ETF FXI good bets (read: What's Behind the Surge in Chinese Tech Stocks & ETFs?).

Tap Cash ETFs?

Cash-like ETFs invest in ultra-short-term bonds and help investors keep money aside for a couple of weeks to a few months with almost no risk. In times of market downturns, these can act as a hedge, protecting the portfolio from significant losses. Unlike equities or longer-duration bonds, the value of cash-like ETFs is less likely to be affected by market turbulence, making them a reliable option during uncertain times.

Buffett is also piling up cash. Hence, one can play cash-like ETFs, including JPMorgan Ultra-Short Income ETF JPST, Janus Henderson Short Duration Income ETF VNLA and Franklin Ultra Short Bond ETF FLUD.

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This article originally published on Zacks Investment Research (zacks.com).

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