Recession fears pushed the S&P 500 (SNPINDEX: ^GSPC) into a brutal bear market last year. In fact, the broad-based index delivered its worst return since the global financial crisis in 2008. But the S&P 500 has rebounded sharply through the first half of this year, buoyed by cooling inflation and stronger-than-expected earnings forecasts. The index is up 14% year to date, and that performance hints at further gains in the coming months.
Since 1950, on occasions when the S&P 500 returned between 10% and 15% in the first half of the year, the index always produced a positive return in the second half, and the median return was 10.9%. In other words, history says the stock market could maintain its momentum through the end of the year. But even if the momentum fizzles and gains fail to materialize, the S&P 500 has still returned about 10% annually over the long term, and Warren Buffett sees that as a compelling investment thesis.
Indeed, Buffett has frequently recommended an S&P 500 index fund as the best way for most investors to gain exposure to the stock market, and readers would do well to consider that advice.
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An S&P 500 index fund offers exposure to many of the most influential businesses
The Vanguard S&P 500 ETF (VOO 1.00%) is one of several S&P 500 index funds investors have at their disposal. Its below-average expense ratio of 0.03% makes it a compelling option, though its composition is virtually identical to that of other S&P 500 index funds. It tracks 500 large-cap stocks, including growth stocks and value stocks from every market sector, that collectively represent about 80% of the U.S. equities market and more than 50% of the global equities market.
Buying shares of the Vanguard S&P 500 ETF is an easy way for investors to get exposure to many of the most influential companies in the world in one fell swoop. The top 10 holdings are detailed below:
- Apple: 7.1%
- Microsoft: 6.2%
- Alphabet: 3.4%
- Amazon: 2.7%
- Nvidia: 1.9%
- Tesla: 1.6%
- Berkshire Hathaway: 1.6%
- Meta Platforms: 1.4%
- ExxonMobil: 1.3%
- UnitedHealth Group: 1.3%
Why Warren Buffett recommends owning an S&P 500 index fund
Rather than relying solely on individual stocks, Warren Buffett believes most investors would do better to own "a cross-section of businesses that in aggregate are bound to do well." An S&P 500 index fund satisfies that goal. It diversifies capital across hundreds of blue-chip American businesses that collectively form the heart of the U.S. economy, which is objectively the largest economy in the world, and subjectively the most innovative. In that respect, buying an S&P 500 index fund is analogous to betting on America, and Buffett likes those odds.
In his 2016 letter to Berkshire Hathaway shareholders, Buffett wrote the following: "For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs." He reiterated his conviction in the American tailwind in his latest letter to shareholders.
Patient investors can buy an S&P 500 index fund with confidence
According to Buffett, the average investor can outperform most professional money managers by simply buying an S&P 500 index fund on a regular basis. History backs that assertion. Just 9% of large-cap equity funds beat the S&P 500 over the last decade, and only 5% beat the benchmark index over the last two decades. In other words, the vast majority of professional money managers actually underperform over long periods of time.
There is always risk where stocks are concerned, but owning an S&P 500 index fund is as close to a guaranteed moneymaker as investors are likely to find. The S&P 500 produced a positive return over every rolling 20-year period since its inception in 1957. That means any investor that bought an S&P 500 index fund during that time made money, as long as they held the index fund for at least 20 years.
