Many people acknowledge that Warren Buffett ranks as one of the greatest stock-pickers of all time. Granted, he's argued that he's really a "business-picker" and not a stock-picker. But his ability to select excellent businesses has enabled him to invest in great stocks.
What isn't as well known, though, is that Buffett is a great fund-picker, too. He has invested some of Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) money in exchange-traded funds (ETFs). There's one Buffett ETF, in particular, that I think could realistically set you up for life.
Image source: Getty Images.
Funds of a feather
Buffett primarily invests Berkshire's money in individual stocks and U.S. Treasurys. However, in recent years Berkshire's portfolio has also had positions in ETFs.
As of March 31, 2023, Berkshire's investments included two very similar ETFs: SPDR S&P 500 ETF Trust (SPY 0.95%) and Vanguard 500 Index Fund ETF (VOO 1.00%). The conglomerate had a little over $16 million parked in each fund.
SPY and VOO share two especially important common denominators. They both attempt to track the S&P 500, an index that features the stocks of the 500 largest U.S. companies. Both ETFs also boast low expense ratios, 0.09% for SPY and 0.03% for VOO.
Does Buffett have a favorite between the two? I think he does. In his 2013 letter to Berkshire Hathaway shareholders, the legendary investor revealed that his will advises that the cash his family will inherit be invested primarily in a low-cost S&P 500 fund. He stated, "I suggest Vanguard's."
Investing on cruise control
Buffett likes S&P 500 index funds because they put investing on cruise control (my words, not his). He knows that most people don't have the time or inclination to study businesses thoroughly enough to pick individual stocks. But he maintains that they don't need to.
In Buffett's view, the best path for most people is to simply own a diversified basket of American businesses and keep their costs low. VOO is a great option that checks off both boxes. Buffett argued in his 2013 shareholder letter that investors who follow this advice are "virtually certain to get satisfactory results."
There are several reasons why Buffett's S&P 500 fund strategy works well. For one thing, it bets on the powerful growth engine and resilience of the U.S. economy. The low cost of investing in an S&P 500 fund is also important. I'm pretty sure that Buffett recommended Vanguard for his family because of its lower expense fees.
Diversification is another big plus of S&P 500 ETFs like VOO. Your money is invested across 500 companies that operate in multiple sectors and industries.
Last, but certainly not least, the S&P 500 itself features a survival-of-the-fittest mode of operation. Companies that don't perform well enough will eventually drop out of the index, while up-and-comers elbow their way into it.
Working wonders over time
Buffett believes that a low-cost S&P 500 index fund such as VOO should beat the returns of most pension funds and professional investment managers over the long run. He's probably right.
If you had invested $100,000 in VOO at its inception in September 2010, you'd now have around $530,000. This assumes, by the way, that you reinvested all dividends received.
Of course, that period included the longest bull market in history. However, over the past 30 years, the S&P 500 has delivered a compound average growth rate (including dividends) of 10.7%. Using this average, $100,000 invested 30 years ago in an S&P 500 fund would have increased to over $2.1 million.
Sure, most people don't have that much money to invest earlier in their lives. Inflation also chips away at the buying power of your investments. But socking away as much as possible in VOO really could set you up for life over time. If you don't believe me, believe Warren Buffett.
