If It Walks Like a Duck: Classifying Berkshire Hathaway

Berkshire Hathaway’s sector classification suddenly became important to many investors after BRK.B (Berkshire’s B Share Class) was added to the S&P 500 on February 12, 2010. Because BRK.B was classified as a Financial, XLF, the most popular Financial Sector ETF, now has a significant weight in BRK.B. Other popular financial sector ETFs, like VFH, have smaller, though still significant, allocations to BRK.B. Since these ETFs are liquid, inexpensive and relatively precise, they’re widely used to make and hedge financial sector bets. However, if a large holding in a Financial Sector ETF doesn’t behave like other Financials, the ETF risks losing considerable precision.

The question many investors are now asking is: Does BRK.B actually belong in the Financial sector? If BRK.B behaves like a Financial, for all practical purposes (including portfolio construction and risk management) it should be treated as a Financial. However, our analysis of BRK.B’s historical returns shows it behaves more like a Consumer Staple stock than a Financial.