Expensive Beta
Buffett always wins
In the article “The Guy Who Beat Buffett and Cathy” [Ref. 1], Josh Brown wrote how Eddy Elfenbein’s actively managed ETF, the AdvisorShares Focused Equity ETF (ticker CWS) has “beaten both Warren Buffett and Cathy Wood over the last five years.”
I have great respect for both Josh Brown and Eddy Elfenbein. They are both masters of the game of investing. I disagree with cherry-picking a start date to compare the performance of the CWS ETF to BRK.B and also comparing it to ARKK ETF, which has crashed due to its long-duration holdings in a rising interest rate environment. However, the analysis based on the selected starting date was correct, and CWS has indeed outperformed both BRK.B and ARKK on both an absolute and a risk-adjusted return basis.
In my opinion, a better comparison is to consider the performance of the CWS ETF since its inception. I will skip ARKK because this is a highly speculative ETF, and it is not fair to compare it to low-volatility ETFs. Below is a relative performance chart of the CWS ETF, BRK.B, and SPY ETF from September 21, 2016 (the first trading day of the CWS ETF) to January 9, 2024.
The chart shows BRK.B is slightly ahead of SPY ETF, and both have slightly outperformed CWS. Below is a performance table.
The winner is BRK.B: lower beta, higher annualized return, but more importantly, no losing years. In addition, CWS ETF is a more expensive beta product, with 0.89% net cost versus 0.09% for SPY ETF
However, we have to admit that replicating the performance of SPY ETF with a stock portfolio to the precision CWS has managed is a remarkable job, and I would go as far as saying it is a lost art.
Before the advent of an ETF to track the performance of the S&P 500 total return at a low cost, investment banks and finance professionals had to come up with a reasonable-size portfolio that minimized tracking errors and transaction costs. The portfolio was also used in a stock-bond allocation like the 60/40. That Eddy was able to do this is remarkable. Outperformance may lie ahead for CWS, and the higher net cost will be justified then. But from inception to January 9, 2024, which was the period of this analysis, Buffett was the winner. Buffett seems to always win.
Ref. 1. Click here Last accessed on January 11, 2024.
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