Warren Buffett’s holding company, Berkshire Hathaway, has about 45 equity positions, in addition to the 60 or so companies that it owns outright. But not all of its equity positions are single stocks. Berkshire Hathaway owns two exchange-traded funds (ETF), The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and the Vanguard S&P 500 ETF (NYSEMKT: VOO). Both of these ETFs track the S&P 500.
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Each of these ETFs make up a negligible portion of the total Berkshire Hathaway equity portfolio. But Buffett has explained many times why he thinks every investor should own a fund that tracks the S&P 500. Here’s his thinking.
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Not everyone can beat the market
Buffett has advised most investors to buy funds that track the S&P 500 on many different occasions over the past few years. At the 2020 Berkshire Hathaway annual meeting, he said it simply: “In my view, for most people, the best thing to do is to own the S&P 500 index fund.”
The main reason Buffett likes index-tracking ETFs is that it’s not easy to beat the market. Granted, Buffett is one of the money managers who has beaten the market, and by an incredible lead. As of last year, Berkshire Hathaway’s annualized gains were 19.8% since 1965, while the S&P 500’s total annualized return over the same time was 10.2%.
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But most money managers don’t beat the market. In any given year, more money managers underperform than outperform the market, including 60% of large-cap fund managers last year. For the average investor, it makes more sense to park your money in a secure index fund than choose a money manager.
Shareholders pay a fee, but it’s typically much lower than paying a money manager. The SPDR ETF has an annual expense ratio of 0.09%, while the Vanguard ETF has an expense ratio of 0.03%.
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It’s for all investing levels
Because it’s so hard to beat the market, and most individual investors have day jobs, it makes sense to entrust your money in an index fund. Money managers are paid to pick stocks. All the more so, individual investors, who have other things to do with their time, might have an even harder time beating the market; so you might as well buy the market, instead, or at least in tandem with your own picks.
At the 2021 Berkshire Hathaway annual meeting, Buffett recommended buying index funds over Berkshire Hathaway stock. “I like Berkshire,” he said, “But I think that a person who doesn’t know anything about stocks at all, and doesn’t have any special feelings about Berkshire, I think they ought to buy the S&P 500 index.”
Buffett often talks about his belief in the American story, and therefore, the market. If you believe that the U.S. economy will continue to grow and perform over time, it makes sense to invest in it. “I will bet on America the rest of my life,” he said at the 2020 meeting.
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It’s a secure route toward wealth creation
Investors dream about beating the market, but you don’t necessarily have to beat the market to get what you need out of investing. Once an investor has sizable funds, it doesn’t take a huge percentage increase to create enough of a dollar increase to enjoy your wealth. If you’ve retired with $1 million in the bank, for example, 10% on that annually, which is the average annualized S&P 500 gain, gets you $100,000 a year.
At the 2021 meeting, Buffett said, “For a given individual, particularly my wife, I just think that … the best thing to do is buy 90% in an S&P 500 index fund.”
Retirees often choose safe stocks and dividend stocks to secure their holdings and generate passive income. If you’re at that stage of life, index funds make a lot of sense. People love listening to Buffett for many reasons, and one of them is that he puts his money where his mouth is. Following Buffett into one of his ETFs is an excellent strategy for almost any investor.
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