In a 2013 Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) shareholder letter, Warren Buffett mentioned where he wanted his wife’s inheritance invested after his death: 10% in Treasury bills and 90% in a low-cost S&P 500 fund.
The three words that came next were as close to an explicit endorsement for an ETF as you’ll find: “I suggest Vanguard’s.” That was written into his estate plan, the instructions of a man who has become known as one of the greatest investors of all-time.
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He’s suggesting that one of the best long-term investments one can make is the Vanguard S&P 500 ETF (NYSEMKT: VOO).
Why the S&P 500 works
The S&P 500 is designed to provide a broad cross-section of the U.S. economy. As companies grow larger, they gain more influence in the index. While the artificial intelligence (AI) revolution continues to expand the tech sector, the index maintains meaningful exposure to the 11 primary S&P sectors.
That means investors can gain access to what’s effectively the entire U.S. economic growth engine within a single ticker. The Vanguard S&P 500 ETF is one of the cheapest ways to own it with an expense ratio of just 0.03%. That means more of an investor’s capital remains in their pockets instead of in the issuer’s hands.
What Warren Buffett would like about VOO
In a word, diversification. Berkshire Hathaway’s portfolio only contains roughly 30 stocks, a large chunk of which is in Apple and American Express. While that wouldn’t seem to make a strong case for diversification, Buffett’s entire life has been about investment research.
For the average retail investor, the diversified approach works better. As he notes in the letter, “The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
The Vanguard S&P 500 ETF provides easy and efficient access to that cross-section.
What Warren Buffett wouldn’t like about VOO
What Buffett wouldn’t appreciate is the currently heavy weighting to the top 10 holdings and the lack of value. Technology is clearly becoming the cornerstone of the U.S. economy. The S&P 500’s 39% allocation to the sector reflects that reality. What’s more, 39% is also the current weight of the Vanguard S&P 500 ETF’s top 10 holdings. That’s a lot of weight to be putting in less than a dozen stocks.
