Following Warren Buffett’s lead has paid off for investors over the long run. The long run doesn’t have to translate to multiple decades. And you don’t have to buy individual stocks preferred by the legendary investor to make a lot of money, either.
One Buffett exchange-traded fund (ETF) has turned $10,000 into over $67,000 since 2010. That’s significantly higher than the $56,000 you’d have from investing $10,000 in Buffett’s favorite stock, Berkshire Hathaway, over the same period.
Buffett’s favorite fund
Which ETF has delivered such a hefty gain? The Vanguard S&P 500 ETF (NYSEMKT: VOO).
As its name indicates, this Vanguard ETF owns stocks in the S&P 500 (SNPINDEX: ^GSPC), an index representing the 500 largest U.S. companies. That doesn’t mean the Vanguard S&P 500 ETF’s portfolio includes 500 stocks, though. It actually owns 503 stocks, because some members of the S&P 500 have more than one share class.
The Vanguard S&P 500 ETF is almost certainly Buffett’s favorite fund. For one thing, Berkshire Hathaway only holds positions in two ETFs (the other is the SPDR S&P 500 ETF Trust). The conglomerate’s stake in the Vanguard ETF, though, is a little higher than its stake in the SPDR ETF.
Buffett also mentioned Vanguard by name in his 2013 Berkshire Hathaway shareholder letter. He revealed that his will specifies that 90% of the cash inherited by his family be invested in “a very low cost S&P 500 index fund.” He added, “I suggest Vanguard’s.
The Vanguard S&P 500 ETF is a low-cost fund. Its annual expense ratio is only 0.03%. The average expense ratio of similar funds based on data from Morningstar is 0.78%.
A 6.7x gain over 14 years
Vanguard launched this ETF on Sept. 7, 2010. If you had invested $10,000 in the fund on that date and never sold any shares, you’d have roughly $67,250 today. That translates to a compound annual growth rate of nearly 14.6%.
How has the Vanguard S&P 500 ETF delivered such impressive returns? Low interest rates throughout much of the last 14 years helped tremendously. S&P 500 companies were able to borrow money cheaply to fund growth.
Technology trends, including the rapid growth of cloud services providers and the adoption of artificial intelligence (AI), also contributed to the ETF’s strong gains. Today, companies in the information technology sector make up 31% of the S&P 500 index.
We can’t overlook the compounding power of dividends, though. Without reinvested dividends, $10,000 invested in the Vanguard S&P 500 ETF in 2010 would now be worth around $51,620. Although that’s still a tremendous gain, it’s well below the amount with dividends included.
Should you buy the Vanguard S&P 500 ETF?
There’s no guarantee the Vanguard S&P 500 ETF will deliver the level of performance going forward that it has over the last 14 years. The S&P 500 is near its all-time high, with the stocks in the index trading at an average price-to-earnings ratio of 27.2.
With this in mind, should you buy the Vanguard S&P 500 ETF? I think the answer for many investors is still a resounding “yes.”
Dimensional Fund Advisors looked at S&P 500 data going back to 1926. It found that the average annualized returns in the year after the index hit a record high were nearly 14% after one year and more than 10% over the following five years. The moral of the story is don’t let all-time highs scare you away.
In the letter to Berkshire shareholders mentioned earlier, Buffett wrote, “American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts).” He was — and is — right. The Vanguard S&P 500 ETF offers an easy way to own a broad basket of the most successful American businesses. To borrow Buffett’s words, it should perform wonderfully over time.
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Keith Speights has positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
This Warren Buffett ETF Has Turned $10,000 Into Over $67,000 Since 2010 was originally published by The Motley Fool
