Exchange-traded funds (ETFs) can be fantastic investments for many people. Not only do they require next to no effort on your part, but they could also help you earn hundreds of thousands of dollars or more over time.
Not all ETFs are created equal, however, and the right choice for you will depend largely on your tolerance for risk and investing goals. That said, there's one ETF I've owned for years and will continue stocking up on throughout the rest of 2023 -- and it's also earned the Warren Buffett seal of approval.
The right ETF for your portfolio
For the most part, Warren Buffett invests in individual stocks. However, he does own one type of ETF: the S&P 500 ETF. Through his holding company Berkshire Hathaway, Buffett owns shares of both the Vanguard S&P 500 ETF (VOO 0.65%) and the SPDR S&P 500 ETF Trust (SPY 0.66%).
Buffett has long recommended S&P 500 ETFs and index funds, and back in 2008, he even famously bet $1 million that this type of investment could beat a group of actively managed hedge funds. He easily won that bet, with his investment earning returns of around 126% over 10 years, while the five hedge funds averaged returns of just 36% in that time.
NYSEMKT: VOO
Key Data Points
There's a good reason why the S&P 500 ETF comes highly recommended by Buffett: it's one of the safest funds out there, yet it can still help you make a lot of money over time. Some of the primary advantages of this type of investment include:
- Immediate diversification: Each S&P 500 ETF includes stocks from 500 companies across a wide range of industries. This provides plenty of diversification with just a single investment, which can lower your risk substantially. Even if a few stocks in the fund struggle, it won't sink your entire portfolio.
- Long track record of success: Every investment has its ups and downs, but the S&P 500 itself has an impeccable long-term record. Analysts at Crestmont Research examined the S&P 500's rolling 20-year returns throughout the index's history, and they found that every single period ended in positive total returns. That means if you had invested in an S&P 500 fund at any point in history and held it for 20 years, you'd have made money -- no matter how volatile the market was.
- Strong and healthy stocks: The S&P 500 includes stocks from 500 of the largest and strongest companies in the U.S., from tech giants like Apple and Amazon to century-old brands like Procter & Gamble and Coca-Cola. No stocks are immune to short-term downturns, but the companies within the S&P 500 are among the best of the best and are far more likely to recover.
Another major perk of this type of investment is that it requires little to no effort. All of the stocks are already chosen for you, so you don't need to spend time researching companies or keeping up with industry trends. Simply invest whatever you can afford, then sit back and wait for your money to grow.
Building wealth with the S&P 500
Despite being a relatively safe and simple investment, the S&P 500 ETF packs a punch. Historically, the market itself has earned an average rate of return of around 10% per year, which means that the annual highs and lows have averaged out to roughly 10% per year over several decades.
If you're investing, say, $200 per month in an S&P 500 ETF earning a 10% average annual return, here's approximately how much you could accumulate over time depending on how many years you invest:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: Author's calculations via investor.gov.
The more time you have to let your money grow (or the more you can afford to invest each month), the more you can potentially earn over time. Again, the S&P 500 ETF is a long-term investment. While you may see significant ups and downs in the near term, it's incredibly consistent over decades.
While the S&P 500 ETF has plenty of advantages, there is one significant downside to consider: it can't beat the market. This type of investment is designed to follow the market, so it's impossible for it to earn above-average returns. If you're looking to maximize your earnings in the stock market, investing in individual stocks may be a better option.
The S&P 500 ETF is a fantastic investment for many people. While it does only earn average returns, that could be a worthwhile trade-off for a safer and more reliable fund that requires little effort. By weighing the pros and cons of this ETF, you can decide whether it's the right fit for your portfolio.
