Warren Buffet historically recommends stock market indexes and exchange traded funds, but he only uses two in the managed fund that made him famous, Berkshire Hathaway. In 2018, he proved his theory, with returns of nearly 126% over 10 years, while his competitors managing hedge funds only averaged 36% returns. The fund in question?
Vanguard S&P 500 ETF (VOO).
While the stock market can be intimidating during volatile market conditions, its money-making potential can’t be minimized. Choosing suitable investments makes it possible to keep savings well protected from market-related uncertainties while building wealth over time.
Axios reports the latest version of the Federal Reserve’s Survey of Consumer Finances shows about 58% of American households own stocks, either directly or indirectly. According to the survey, about 21% of Americans have direct stock investments — up from 15% in 2019.
No single investment option is suitable for everyone because different people have different preferences.
Buffett highly recommends investing in an S&P 500 ETF for most retail investors, assured it can generate excellent returns with minimal effort. Throughout his illustrious career, Buffet has invested chiefly in individual stocks. However, through his holding company, Berkshire Hathaway, in addition to Vanguard ETF, he invested in SPDR S&P 500 ETF Trust (SPY).
S&P 500 Exchange Traded Fund: An Overview
The Standard and Poor’s 500 (S&P 500) Index accurately measures the nation’s 500 largest corporations’ market capitalization and is a snapshot of the U.S. economy. The S&P 500 was the benchmark when the first ETF was created.
By the S&P 500 definition, each financial institution managing the ETF purchases stock in all the companies listed in the index, with the same weighting used by the index. As a result, money invested by the investors rises or falls in accordance with the S&P 500.
The ETF managers must keep selling and purchasing about a dozen individual stocks each year to stay abreast of changing underlying indexes. As companies get bought out, some stocks may disappear over time. Other companies lose their S&P 500 listing because they fail to meet its stringent criteria. When this happens, the outgoing index component is removed by the ETF sponsor from the index holdings and is replaced with a new listing.
Advantages of Exchange Traded Funds
The ETF is extremely popular as an investment vehicle because it combines the best characteristics of mutual funds and stocks with an integrated investment structure. An ETF primarily aims to provide investors with a convenient diversification option. Rather than managing its holdings actively, the underlying principle of an ETF replicates the performance of the stock market index.
The ETFs’ holdings are disclosed daily, providing investors with complete visibility of assets held within the fund. Also, different specific asset classes, themes, or sectors can be targeted with the ETFs. The ETFs can cover different market types, including equities, commodities, fixed-income securities, or alternative investments.
- Liquidity: ETFs are traded at market prices throughout the day, allowing investors the flexibility to buy or sell shares throughout the day or as soon as the market opens. This flexibility is not available with mutual funds.
- Tax Efficiency: ETFs offer tax advantages to investors by minimizing the distribution of capital gains through its process of creation and redemption.
- Lower Expenses: Compared to mutual funds, the expense ratios of ETFs are generally lower because the ETF manager spends less time overseeing the fund.
- Transparency: ETF investors always have a clear knowledge of what the ETF holds because providing daily disclosure regarding their holdings is a requirement for ETFs. This transparency is essential for many investors.
- Diversification: Many investors prefer investing in an ETF because it allows them to access a broad spectrum of assets without the hassle of purchasing many different products or stocks. Therefore, compared to buying a single stock, the risk is generally much lower while investing in an ETF.
Understanding the Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO) is an ETF that invests in the stocks of some of America’s largest companies. This is an appealing option for many investors because of its excellent diversification, providing access to equities of large corporations, commonly known as large-cap stocks.
The top 10 holdings of the VOO include industry heavyweights such as Apple, Microsoft, Amazon, Tesla, and Berkshire Hathaway Class B. Compared to stocks of smaller companies, these large-cap stocks offer significantly higher stability and a solid track record. As of May 31, 2023, there were 505 stocks in the Vanguard S&P 500 Index ETF portfolio. Paying quarterly dividends, it yielded 1.56% in the first quarter of 2023.
The third largest ETF, VOO, attracted new investments amounting to $34 billion in the past year. Its low net expense ratio of 0.03% has made it an attractive investment option for retail investors. Moreover, for 50 days in the last 3 months, more than 4 million shares of VOO were traded.
This liquidity is sufficient to meet the requirements of most investors. Since its inception through September this year, VOO has recorded an impressive annualized rise of 13%. This means that investors who have bought and held on to their stocks have seen a fivefold increase.
How Common Investors Can Benefit By Investing in VOO
Many look to Warren Buffett as one of the greatest stock-pickers ever, and his recommendations play a significant role in the market decisions of many investors.
In 2008, Buffett famously put $1 million at stake, claiming that an S&P 500 fund could generate higher total returns than a group comprised of five hedge funds managed actively. His bet paid off when the S&P 500 investment generated a 126% return, while other managed hedge funds generated average returns of just 36%.
As of March 31, 2023, Berkshire’s investments had more than $16 million parked in VOO. According to Buffet, most people can benefit immensely by owning a diversified portfolio of top American businesses while keeping their expenses low. VOO is an excellent option for them because it ticks off both these boxes. In a shareholder letter circulated in 2013, Buffett argued that investors following this advice are highly likely to get satisfactory results.
Buffet also believes that in the long run, VOO has the potential to generate better returns than most pension funds. The compound average growth rate delivered by the S&P 500 over the past 30 years is 10.7%. If this is the average, an S&P 500 fund investment of $100,000 made 30 years ago would have increased to more than $2.1 million. Most people will find it difficult to invest that much money in the earlier part of their life. However, any investor can use VOO to achieve long-term financial freedom because this ETF has no minimum investment requirement.