Meet OMAH: The High-Yield Buffett-Style ETF Taking Aim at SCHD

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To meet their investment goals, some people turn to popular exchange traded funds (ETFs) like the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD). Also, they may choose to own shares of Berkshire Hathaway (NYSE:BRK-B) stock, which isn’t actually an ETF but does provide exposure to a diversified basket of stocks.

There’s no denying that the SCHD ETF has benefits for investors, but it’s not the only way to generate passive income. For fans of Berkshire Hathaway and its famous CEO, Warren Buffet, there’s a fund that also produces income and could rival the Schwab U.S. Dividend Equity ETF. In the end, you might be convinced to try out a unique ETF that competes with SCHD and even with Berkshire Hathaway stock.

SCHD and Buffett-Style Investing

To a limited extent, investors can implement Buffett-style investing with the Schwab U.S. Dividend Equity ETF. For many years, Buffett and Berkshire Hathaway have focused on rock-solid, reasonably valued businesses that pay reliable dividends; a couple of examples would be Coca-Cola (NYSE:KO) and Chevron (NYSE:CVX).

Passive income seekers may be disappointed to learn, however, that Berkshire Hathaway stock doesn’t pay a dividend. Since there is some overlap between SCHD’s holdings and Berkshire Hathaway’s holdings (Coca-Cola stock, Chevron stock, etc.), Buffett aficionados and income investors might be interested in the Schwab U.S. Dividend Equity ETF.

In all, the SCHD ETF has 103 stocks in its holdings list and they’re generally blue-chip companies that pay consistent dividends. Berkshire Hathaway stock doesn’t deduct an expense ratio since it’s not an ETF; the Schwab U.S. Dividend Equity ETF does impose an annual expense ratio, but it’s only 0.06% so it’s not very costly.

Regarding income opportunities, the SCHD ETF currently advertises a 3.79% annual distribution yield. Consequently, income seekers may want to add the Schwab U.S. Dividend Equity ETF to a position in Berkshire Hathaway stock. If they really like SCHD, they might even be tempted to buy it instead of Berkshire Hathaway stock.

How does the SCHD ETF manage to achieve such a high distribution yield? Along with holding a basket of dividend-yielding stocks, the Schwab U.S. Dividend Equity ETF may trade “derivatives, principally futures contracts.”

The fund’s prospectus acknowledges that trading derivatives can involve risks, such as potentially reducing SCHD’s performance and increasing its volatility. Thus, while the Schwab U.S. Dividend Equity ETF pays a dividend and Berkshire Hathaway stock doesn’t, the SCHD ETF involves risks that investors should consider.

Meet OMAH, an Alternative to SCHD

SCHD’s 3.79% distribution yield is quite good, and the fund’s holdings somewhat overlap Berkshire Hathaway’s holdings. However, for high yield seekers and Buffett fans there’s another ETF that could have stronger appeal that the Schwab U.S. Dividend Equity ETF.

Please allow me to introduce to you a fund called the VistaShares Target 15 Berkshire Select Income ETF (NYSEARCA:OMAH). This fund attempts to provide exposure to Berkshire Hathaway’s 20 largest holdings by market capitalization while also providing substantial income.

Hence, whereas SCHD overlaps Berkshire Hathaway’s holdings somewhat, OMAH strongly matches Berkshire’s holdings. You won’t get an exact one-to-one match, but you’ll probably get reliable indirect exposure to Berkshire Hathaway’s holdings through the VistaShares Target 15 Berkshire Select Income ETF.

Although the OMAH ETF actually has 70 holdings in total, the lion’s share of the fund consists of Berkshire Hathaway stock (10.33% of the ETF’s weighting) and Berkshire’s 20 largest holdings. You’ll find many of the stocks you’d expect to see, such as Coca-Cola, Chevron, Apple (NASDAQ:AAPL), and American Express (NYSE:AXP).

Much like the SCHD ETF and Berkshire Hathaway stock, the VistaShares Target 15 Berkshire Select Income ETF provides broad diversification to a multitude of market sectors. Moreover, like the Schwab U.S. Dividend Equity ETF, OMAH uses derivatives to generate extra income.

In contrast to SCHD, which seems to focus on futures contracts, the VistaShares Target 15 Berkshire Select Income ETF appears to emphasize options-trading strategies. In particular, the OMAH ETF “earns income by collecting premiums from selling (writing) options,” presumably call options on those aforementioned Berkshire stocks.

OMAH: Rewards Could Outweigh Risks

Since the VistaShares Target 15 Berkshire Select Income ETF may sell covered call options to generate income, there’s a risk of limited share-price gains. On the other hand, the OMAH ETF’s 15% annual distribution rate easily beats 3.79% for SCHD and 0% for Berkshire Hathaway stock.

Another benefit of the VistaShares Target 15 Berkshire Select Income ETF is that it pays out its distributions on a monthly basis. In contrast, the SCHD ETF has a quarterly distribution schedule.

Finally, it’s worth noting that the OMAH ETF has a relatively high annual expense ratio of 0.95%. This, along with the fund’s covered call writing strategies, could reduce the share-price performance of the VistaShares Target 15 Berkshire Select Income ETF.

As long as you understand and accept those drawbacks, you might want to consider a position in the OMAH ETF. In some respects, it’s like Berkshire Hathaway stock but with a nice passive income stream that beats what SCHD has to offer. Whether you’re a Buffett devotee or not, the VistaShares Target 15 Berkshire Select Income ETF could be your ticket to instant portfolio diversification and hefty monthly cash payouts.

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