Warren Buffett served as the chief executive officer of Berkshire Hathaway (BRK.A 0.46%)(BRK.B 0.38%) from 1965 until the end of 2025, when he stepped down. During his 60-year tenure, he transformed Berkshire from a struggling textiles manufacturer into a $1 trillion conglomerate with more than 60 wholly owned subsidiaries, and minority stakes in more than 40 other companies.
Berkshire stock delivered a compound annual return of 19.7% during Buffett's time as CEO, which would have been enough to turn a mere $500 investment in 1965 into $24.2 million today. Buffett knows that typical investors would struggle to replicate his success, so he often recommends they buy a low-cost S&P 500 index fund instead of trying to pick individual stocks.
In a 2013 letter to shareholders, he specifically recommended the Vanguard S&P 500 ETF (VOO 1.53%) because of its ultra-low fees. Here's how this exchange-traded fund can help build wealth for decades.
Image source: The Motley Fool.
A great index fund for investors of all experience levels
The S&P 500 is America's most widely followed stock market index because of its diverse composition, with 500 companies from 11 economic sectors represented. It is rebalanced quarterly, when stocks that no longer meet its strict criteria are removed and replaced with more suitable candidates.
To qualify for inclusion in the index, a company must be profitable, and it must have a market capitalization of at least $22.7 billion, among other things. But even after ticking all of those boxes, a special committee makes the final decision, which ensures only the highest quality companies make the cut.
The S&P 500 is weighted by market capitalization, meaning the most valuable companies in the index have a greater influence over its performance than the smallest. That's why information technology is the largest of the 11 sectors, with a weighting of 33.7% -- it's home to Nvidia, Apple, Microsoft, and Broadcom, which have a combined market cap of $13.5 trillion.
The next three largest S&P 500 sectors are as follows:
- Financials (13.5%), which includes companies like Berkshire Hathaway, JPMorgan Chase, and Visa.
- Consumer discretionary (10.6%), which is home to Amazon, Tesla, and McDonald's.
- Communication services (10.5%), which features Alphabet, Meta Platforms, and Netflix.
Healthcare, industrials, consumer staples, energy, utilities, materials, and real estate are the remaining seven sectors. So, although it's very top-heavy, the index is highly diversified.
The Vanguard S&P 500 ETF aims to maintain the same holdings with similar weightings to produce like-for-like performance, minus fees. Speaking of which, this is one of the cheapest index funds that investors will find. It has an expense ratio of 0.03%, which means an investment of $10,000 would incur an annual cost of just $3.
A stellar track record when it comes to building wealth
Investing is inherently risky, even when sufficiently diversified. Volatility is the price we pay for an opportunity to earn significant returns over the long run.
According to investment management firm Capital Group, the S&P 500 suffers a sell-off of at least 5% once per year, on average, and a correction of 10% or more every 2 1/2 years. Bear markets, which are defined by peak-to-trough declines of 20% or more, come around every six years or so.
But even after accounting for every sell-off, correction, and bear market since the S&P 500 was established in 1957, the index has still produced a compound annual return of 10.6%. That means a $10,000 investment 68 years ago would be worth $9.4 million today (assuming you reinvested all dividends).
NYSEMKT: VOO
Key Data Points
Past performance isn't a guarantee of future results, but emerging industries like artificial intelligence (AI), robotics, autonomous driving, and even quantum computing have the potential to fuel significant returns in some of the most influential stocks in the S&P 500 from here, including Nvidia, Microsoft, Apple, Broadcom, and Alphabet. This could support continued upside in the index overall.
As long as investors think in decades rather than months or years, they are likely to be rewarded by taking Warren Buffett's advice and buying an index fund like the Vanguard S&P 500 ETF.
