When you’ve been as successful an investor as Warren Buffett, you make headlines any time you buy an asset. As noted by CNBC’s “Buffett Watch,” the Berkshire Hathaway chairman recently upped his stakes in Liberty SiriusXM and Occidental Petroleum.
If you really want to be like Buffett, you can scroll down on that page to get a full portrait of Berkshire’s portfolio of public investments. The list is full of stocks, with the notable exception of two exchange-traded funds: SPDR S&P 500 ETF Trust (symbol: SPY) and Vanguard S&P 500 ETF (VOO).
These low-cost funds track the performance of the broad U.S. stock market via the S&P 500, and although they make up a miniscule portion of Buffett’s portfolio, he’s said over and over that similar investments should make up the majority of yours.
“In my view, for most people, the best thing to do is own the S&P 500 index fund,” Buffett said at Berkshire’s 2020 annual meeting.
Buffett’s thinking here is straightforward. Most non-professional investors (and even many professional stock-pickers) have very little chance of outperforming the market. But index fund investors get exposure to the entire U.S. market and can benefit from its historical upward trajectory — and for cheap.
“The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way,” Buffett told CNBC in 2017.
How to choose an S&P 500 index fund
Berkshire owns shares in two prominent S&P 500 funds, but they’re far from the only ones on the market. Each one you come across will give you roughly the same exposure and roughly the same returns. The major differentiator is cost.
Take the two funds in Buffett’s portfolio. SPY comes with an expense ratio of 0.095%, while VOO charges 0.03%. That may not seem like much, but over the course of your life as an investor, it can make a difference.
After all, money you pay in the form of fees is money you’re not investing and money that isn’t compounding for you. It’s the chief reason Morningstar analysts give a “gold” rating to VOO and a “silver” to SPY.
Say you invested $10,000 in VOO and earned a 7% annualized return over the course of 45 years. At the end of the term, you’d have $207,208, having paid $908 in fees, according to Bankrate’s mutual fund fees calculator. The same investment and return in SPY would cut your total to about $200,000 with fees nearing $3,000.
Why would anyone pay more for the same product? In the case of SPY, it comes down to being able to get a good price on options trades, says Todd Rosenbluth, head of investment research at VettaFI.
“SPY is the more appealing option for short-term trading purposes where the spreads are super tight,” he says.
But if you’re a long-term investor, you generally want to aim to keep things as cheap as possible. VOO and other ultra low-cost funds are “more appropriate products for people holding for intermediate or long time horizons,” Rosenbluth says. “The lower expense ratio will result in savings and more money going into the equity market.”
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