Warren Buffett, chairman and CEO of $340-billion-plus Berkshire Hathaway, said in his recently released and much studied annual letter, "For 240 years it's been a terrible mistake to bet against America, and now is no time to start."

Buffett has created an enormous conglomerate heavily focused on U.S. companies and pillars of the domestic economy. "Berkshire operates in more industries than any company I know of," Buffett wrote.

This fact could make it hard for investors to recreate what Buffett has achieved. You could buy shares of Berkshire Hathaway, but Buffett has said himself that its performance edge is now harder to maintain and Berkshire could become an expensive index fund.

"Investors who diversify widely and simply sit tight with their holdings are certain to prosper," Buffett wrote this year. Indeed, there are plenty of index funds available to clone your own Berkshire Hathaway. Here are a few ideas.

— By Eric Rosenbaum, CNBC.com
Posted 9 March 2016

Burlington Northern Santa Fe railroad is the largest of what Buffett refers to as his "Powerhouse Five" bets, the five most profitable non-insurance businesses.

Buffett's bet on trains, planes and automobiles also includes the NetJets fleet of business jets and Marmon, another of the "Powerhouse Five" companies, though it falls in Berkshire's finance businesses' bucket.

So it can be tough to replicate Berkshire's transport bet. But consider what Buffett wrote about Marmon's railcar service in his annual letter: "If our fleet was connected to form a single train, the engine would be in Omaha and the caboose in Portland, Maine."

The transport sector remains one of the few still officially in correction. Buffett said BNSF recovered nicely in 2015 after a bad year and cited BNSF's fuel efficiency and cost to customers as features other rails can't offer.

ETF solution: Maybe Buffett is right about BNSF, but the easiest way to make the bet is with the iShares Transportation Average ETF (IYT) or SPDR S&P Transportation ETF (XTN). XTN is cheaper by 11 basis points, and over the past three- and five-year periods has significantly outpaced IYT, according to XTF.com data.

Berkshire spent $11.5 billion last year on BNSF and Berkshire Hathaway Energy, the "Powerhouse Five" utility-sector bet. Infrastructure gives Buffett a way to spend his "endless gusher" of cash. But a bet on "regulated, capital-intensive" businesses makes sense for everyone:

"We relish making such investments as long as they promise reasonable returns. ... It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects."

Of course, Buffett thinks he has made the best utility bets. He even called out utilities for being at risk of disruption by renewables, writing that tax credits for solar and wind projects (which Berkshire uses), "May eventually erode the economics of the incumbent utility."

ETF solution: The Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF (VPU) or iShares U.S. Utilities (IDU) are the biggest options. Vanguard's is the cheapest option, at 0.10 percent annually; IDU is the most expensive, at 0.46 percent annually. And cost does matter: Over the past three- and five-year periods, performance from these ETFs have been very similar.

Buffett rarely has a kind thing to say about "imaginative" investment bankers, and this year's annual letter was no exception, but you can't be like Buffett and not bet big on the banks. Financial services stocks are five of his 10 biggest bets among publicly traded stocks: American Express, Wells Fargo, U.S. Bancorp, Goldman Sachs and Bank of America. Together, Berkshire holds roughly $55 billion worth of these five stocks.

ETF solution: The easiest way to bet on the banks is either a diversified financials ETF or bank-specific one, but the broader bet has been the better one.

The Financial Select Sector SPDR (XLF) and Vanguard Financials ETF (VFH) are the cheapest and have had similar performance over the past three- and five-year periods. The more narrow SPDR S&P Bank ETF (KBE) has trailed both by a significant margin and is much more expensive — more than twice XLF's fee and three times VFH's fee.

Berkshire's "huge and growing insurance operation" had its 13th consecutive year of underwriting profit in 2015.

Buffett loves GEICO and its chairman and CEO Tony Nicely, but noted that property casualty "has been the engine that has propelled our expansion since 1967."

P/C insurers receive premiums upfront and pay claims later. "This collect-now, pay-later model" leaves P/C companies holding large sums, called the "float." Insurers can invest this float for their own benefit. Bekshire's float is at $88 billion.

Buffett said, "We've spent 48 years building this multifaceted operation, and it can't be replicated."

ETF solution: Buffett is probably right (sigh), but an investor does have four insurance ETF options, one homing in on the P/C business: the PowerShares KBW Property & Casualty Insurance Portfolio (KBWP). It has been as good a bet. Over the past one-year, three-year and five-year periods, KBWP has far outperformed the broader insurance ETFs and has generated a 113 percent return over five years, almost twice the broader insurance ETFs' average performance.

Three of Buffett's top 10 stock picks are among the most well-known consumer staples' stocks: Kraft Heinz, Wal-Mart Stores and Coca-Cola. Berkshire's Coke holding is valued at more than $17 billion.

In discussing Kraft Heinz in this year's letter, Buffett — who claims to drink as many as five cans of Coke a day — wrote that "Heinz ketchup or mustard ... go with your Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite meal."

ETF solution: Add Costco to the menu — one of Berkshire vice chairman Charlie Munger's favorite companies — and this is one of the easier Berkshire pillars to recreate using an ETF. It has also done notably better as a sector than Buffett's favorite "meal."

The Consumer Staples Select Sector SPDR (XLP) and Vanguard Consumer Staples (VDC) are up 98 percent over the past five years. An even better performer (though with a higher expense ratio) is the Guggenheim S&P Equal Weight Consumer Staples ETF (RHS), which is up 122 percent in the past five years and has also significantly outperformed in the one-year and three-year periods.

Berkshire's Clayton Homes is the second-largest homebuilder in America. Last year it sold 34,397 homes, about 45 percent of the manufactured homes (typically lower-income homes) bought by Americans.

Around 70 percent of new homes costing $150,000 or less come from this industry. Clayton sells a little less than half of its homes through its own network of 331 stores.

ETF solution: The better of the two main options for Buffett purposes is the iShares U.S. Home Construction ETF (ITB). That's because it's much closer to a pure-play on homebuilders, with two-thirds of the portfolio in this niche, while the SPDR S&P Homebuilders (XHB) is only one-third homebuilders and many consumer discretionary stocks. Over the past five years, ITB has returned 93 percent, a 10 percent edge over XHB.

Rates remain low and financials have been more out of favor than anticipated as the Fed stopped easing, Buffett noted this across all of his financial services holdings: "In banking terms, Berkshire is — and always will be — heavily asset-sensitive and will consequently benefit from rising interest rates."

Key to Clayton's homebuilding operation is its $12.8 billion mortgage portfolio. It originates about 35 percent of all mortgages on manufactured homes. "The strong desire of our borrowers to have a home of their own is one reason we've done well with our mortgage portfolio," Buffett wrote.

ETF solution: Buffett cited this year how important mortgage origination is to society and there are a few mortgage bond ETFs.

The Vanguard Mortgage-Backed Securities ETF (VMBS) is almost one-third the price of the iShares MBS Bond ETF (MBB), and performance has been similar over the past five years, returning 15 percent. An investor will get a broader government-backed mortgage mix from these ETFs than Clayton's borrowers, but Buffett would advise not to let that breed a false sense of confidence.

Buffett responded to press scrutiny of Clayton in this year's letter. It had to foreclose on 2.64 percent of manufactured-home mortgages last year, and 95.4 percent of Clayton borrowers were current on their payments at year-end. And he added, "Despite the low FICO scores and income of our borrowers, their payment behavior during the Great Recession was far better than that prevailing in many mortgage pools."

Buffett agreed to a Berkshire buyback policy in 2011 and for the first time conducted a share repurchase of $1.3 billion in 2012. With the stock's recent underperformance, it could be time again for another Berkshire buyback. "If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice," he wrote in his 2011 annual letter.

A more typical way Buffett benefits from buybacks is from his "big four" stocks: American Express, IBM, Coke and Wells Fargo, serial repurchasers of shares. "The earnings our investees retain are often used for repurchases of their own stock — a move that increases Berkshire's share of future earnings without requiring us to lay out a dime," he wrote this year.

IBM is a good example. Over the past six years it has reduced share count by 24 percent and raised earnings by an equal amount.

ETF solution: There is an ETF for this "on another company's dime" approach, but only one with a long history: the PowerShares Buyback Achievers ETF (PKW). Its expense ratio is twice that of the SPDR S&P 500 Buyback ETF (SPYB), which just launched last year. Both have trailed the stock market in the past year, but over the past five years, PKW has outperformed the S&P 500, with a return of 80 percent.

Buffett is synonymous with big acquisitions, and that's something Berkshire will find difficult to pull off as easily in a post-Buffett era. He has little love for activist investors but did say in this year's annual letter that his relationship with Brazilian private equity firm 3G Capital and its founder Jorge Lemann is key for Berkshire.

Referencing 3G's reputation for relentless cost-cutting, Buffett said they share "a passion to buy, build and hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing this goal."

Buffett said his friendly acquisition approach won't change, but his bet on America is ultimately about corporate productivity, and while 3G's methods may be different than his own, "certain hostile offers are justified."

"Some CEOs forget that it is shareholders for whom they should be working, while other managers are woefully inept. In either case, directors may be blind to the problem or simply reluctant to make the change required," Buffett wrote.

ETF solution: The jury is still out on the limited number of ETFs that replicate M&A and activist strategies. The Global X Guru Activist Index ETF (ACTX) is less than a year old, while PowerShares has offered a private equity ETF (PSP) that hasn't produced notable results over its history. There are also a few merger arbitrage ETFs, IQ Merger Arbitrage (MNA) and ProShares Merger (MRGR), which take advantage of the stock prices of companies in previously announced deals, but that's certainly not the kind of productivity that Buffett is talking about.

Buffett made a huge acquisition last year with the $32 billion cash deal for Precision Castparts. In fact, it was so big that the "Powerhouse Five" will become the "Powerhouse Six" next year.

And the "personal thank you" he put in the annual letter about the deal highlights the idea of tapping the ideas of multiple hedge fund managers.

"The PCC acquisition would not have happened without the input and assistance of our own Todd Combs, who brought the company to my attention a few years ago and went on to educate me about both the business. ... Though Todd and Ted Weschler are primarily investment managers ... both of them cheerfully and ably add major value to Berkshire in other ways as well. Hiring these two was one of my best moves."

ETF solution: Combs and Weschler were hired to handle more of Berkshire's stock-picking. There are at least seven ETFs that attempt to replicate the best ideas of hedge fund managers, including Buffett, and until the last year or so, these ETFs had gotten off to a good start.

Buying each one of these ETFs would make for one pretty expensive fund! You might also get some stock overlap between ETFs, for example, holding a buyback ETF as well as a banking or consumer staples portfolio. So feel free to pick and choose from all of these ETFs to replicate sector exposures and investing aims as part of your own bet on America. Or you can take Buffett's most basic index fund advice of all.

Buffett provided the following directions to the trustee of his fortune, and to his wife, for his $62 billion fortune:

"My advice to the trustee could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund (I suggest Vanguard's). I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers."

ETF solution: You can go with Vanguard's S&P 500 ETF (VOO), the SPDR 500 (SPY) or iShares Core S&P 500 (IVV) and add 10 percent exposure to a short-term bond ETF, such as iShares 1-3 Year Treasury Bond Fund (SHY), the Schwab Short-Term US Treasury (SCHO) or Vanguard Short-Term Government Bond Fund (VGSH) and call it a day. ...

Or 240 years.