Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has often warned lay investors about the pitfalls of short-term thinking and actively trading individual stocks based on ephemeral trends. Keeping with this theme, the Oracle of Omaha has repeatedly advised investors to consider passively managed index funds with low management fees and that track a broad range of fundamentally sound businesses.
In Berkshire's 2013 annual shareholder letter, Buffett laid this strategy bare by noting that a mix of 10% cash in short-term government bonds and 90% in a low-cost S&P 500 index fund would likely deliver superior returns compared to most professional money managers who charge high fees. And Buffett has indeed followed his own advice in the construction of his holding company's stock portfolio. Here is a brief look at one brilliant Berkshire holding that most investors should buy without hesitation.
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Be like Buffett: Buy this low-cost ETF
Buffett is a big fan of Vanguard exchange-traded funds (ETFs), and for good reason. Berkshire presently holds a relatively small position (roughly $17 million at last count) in the Vanguard 500 Index Fund (VOO 1.00%), but he has often recommended it to lay investors as a way to gain broad exposure to 500 of the largest companies in the U.S. at a rock-bottom expense ratio. Moreover, the Vanguard 500 Index Fund, also known as VOO for short, sports an expense ratio of only 0.03%, which is a whopping 96% lower than similar types of funds that track this benchmark U.S. stock index.
How does VOO get away with charging such low fees? The secret harkens back to the vision of Vanguard's founder, Jack Bogle. Bogle set up Vanguard so that the company is owned by its funds, which, in turn, are owned by shareholders. This means that Vanguard has no external investors who demand profits, so it can charge exceptionally low fees for its ETFs. This low-fee structure has enabled VOO -- as well as several other Vanguard ETFs -- to consistently deliver top-notch returns for shareholders over the long term.
How has the VOO performed historically? Given that it is an index fund that tracks the performance of the S&P 500, VOO has closely followed the performance of this major U.S. benchmark since its inception. But that hasn't been a bad thing at all for shareholders. Over the past 10 years, VOO has generated a total return of nearly 200%. That's wild in some respects. After all, the fund doesn't engage in actively trading stocks, employing overly complicated leverage schemes, or trying to pick the next big thing. It simply mimics the performance of the S&P 500.
Perhaps best of all, VOO doesn't require investors to constantly scan headlines or worry about geopolitical events before buying shares. It is designed to be a low-stress investing vehicle that requires little more than consistent contributions from shareholders over a long period of time.
Key takeaway
In all, this Buffett pick arguably deserves to be a top holding in most people's portfolios due to its low-cost nature, exceptional historical performance, and its ability to provide diversification across a wide range of large-cap U.S. companies.
