If you’ve been as successful an investor as Warren Buffett, whenever or wherever you buy and sell an asset, it is sure to make headlines. According to ‘Buffett Watch’ News, Berkshire Hathaway chairman just increased their stake in Liberty SiriusXM and Occidental Petroleum.
If you really want to learn how to be like Buffett, you can scroll down that page for a full picture of Berkshire Hathaway’s public investments. The pages are mostly made up of stocks, but there are two exchange-traded funds not even included in this list: SPDR S&P 500 ETF Trust (symbol: SPY) and Vanguard S&P 500 ETF (VOO).
These funds charge fees low enough that they track the performance of the broad U.S. stock market via the S&P 500; while only a fraction of Buffett’s portfolio earnings come from them, he often says that such investments should make up the bulk of an ordinary investor‘s holdings.
Also Read- Rupert Murdoch Announces Engagement for the Sixth Time in 92
“Just for most people I think that the best thing to do is park in an S&P 500 index fund,” Buffett said at Berkshire’s 2020 annual meeting.
Buffett’s thinking here is simple. Most non-professional investors (and many professional stock pickers too) have only an extremely small chance of outperforming the market. But when you own index funds, you get exposure to all of U.S. markets and can profit from its historical upward march – all for next to nothing.
“The trick is not to pick the right company. The trick is essentially to buy all the big companies through the S&P 500 and do it in a very, very low-cost way on a consistent basis,” Buffett told News in 2017.
How to choose an S&P 500 index fund
Berkshire controls shares in two of the most massive S&P 500 ETFs. But these are by no means the sole items on sale. Where-ever they may be, each such fund will offer roughly the same mix of holdings and roughly equal returns. The chief differentiation is cost.
Also Read- Temple University Investigates Allegations of Match-Fixing in Men’s Basketball Game
Take Buffett’s portfolio of funds, for example. SPY is charged at an expense ratio of 0.095% while VOO comes in at 0.03%. Both of these numbers indeed seem tiny, but over years of investing they would work out into quite a gap.
In short, the money you spend on fees is money you are not investing, money that does not compound for you. One chief reason Morningstar analysts give a “gold” rating to VOO and a “silver” one toward SPY.
If you invested USD 10,000 in VOO, and made a 7 per cent annualized return to get an accumulated amount of USD 207,208 at the end of 45 years, fees total just $908 by Bankrate’s mutual fund fees calculator. The same investment and return in SPY requires total funds of about $200,000 with fees pushing $3,000.
Somebody should buy a product at a higher price? In the case of SPY, this is because there are generally especially cheap options trades to be had. “SPY is a superior choice for short term trading where the spreads are super tight,” Says Todd Rosenbluth, head of investment research at VettaFI.
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.”
