When you have been as successful an investor asWarren Buffett, you make headlines every time you buy an asset. As noted by CNBC's "Buffett ur”, the chairman of Berkshire Hathaway recently increased his stakes in Liberty SiriusXM and Occidental Petroleum.
If you really want to be like Buffett, you can scroll down that page for a complete portrait of Berkshire's portfolio of public investments. The list is full of stocks, with the notable exception of two exchange-traded funds: the SPDR S&P 500 ETF Trust (symbol: SPY) and the 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 while they make up a minimal portion of Buffett's portfolio, he has said time and time again that similar investments should make up the majority of yours.
“In my opinion, the best thing for most people to do is to own the S&P 500 index fund,” Buffett said at Berkshire's 2020 annual meeting.
Buffett's thinking here is simple. Most non-professional investors (and even many professional stock pickers) have very little chance of outperforming the market. But index fund investors gain exposure to the entire US market and can benefit from its historic upward trajectory – and it's cheap.
"The trick is not to pick the right company. The trick is essentially to buy all the great companies through the S&P 500 and do it consistently and in a very, very cheap way," Buffett said.CNBC in 2017.
How to Choose an S&P 500 Index Fund
Berkshire owns shares in two leading S&P 500 funds, but they are far from the only ones in the market. Every example you come across will give you about the same exposure and about the same returns. The biggest differentiator is cost.
Consider the two funds in Buffett's portfolio. SPY comes with an expense ratio of 0.095%, while VOO charges 0.03%. It 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 fees is money you don't invest and that isn't compounded for you. That's the main reason for Morningstar analystsgive a "gold" rating to VOO and a "silver" to SPY.
Suppose you invested €10,000 in VOO and achieved an annual return of 7% over a period of 45 years. At the end of the term, you would have $207,208 after paying $908 in fees according toBankrates fondsgebyr sprinkler. The same investment and return in SPY would bring your total down to about $200,000, with fees approaching $3,000.
Why would anyone pay more for the same product? In SPY's case, it's all about getting a good price on options trades, says Todd Rosenbluth, head of investment analysis at VettaFI.
“SPY is the more attractive option for short-term trading purposes where 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 suitable products for people who hold for the medium or long-term horizon," Rosenbluth says. “The lower expense ratio will result in savings and more money for the stock market.”
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