Warren Buffett’s Timeless ETF Recommendation

For decades, Warren Buffett, one of the most successful investors in history, has been pointing to the same ETF recommendation for most investors. It’s not a stock tip or a sector call, but rather an index fund that anyone can buy.

In his 2016 shareholder letter, Buffett wrote, ‘My regular recommendation has been a low-cost S&P 500 index fund.’ This advice has remained consistent throughout the years, including in his 2021 annual meeting at Berkshire Hathaway, where he stated, ‘In my view, for most people, I think that the best thing to do is buy an S&P 500 index fund.’

The most direct version of this advice came in his 2013 letter to Berkshire Hathaway shareholders, where he described the instructions he had written into his will for the money he would leave to his wife: ‘My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors, whether pension funds, institutions or individuals, who employ high-fee managers.’

Buffett’s skepticism about active management is not just philosophy, but also backed by data. Over the past 10 years, more than 85% of large-cap mutual funds available to U.S. investors have underperformed the S&P 500 after fees. Over 15 years, nearly 90% of those funds lagged the benchmark, according to The Motley Fool, citing S&P Dow Jones Indices data.

The Vanguard S&P 500 ETF (VOO) is the specific fund that Buffett recommends. It tracks the S&P 500, charges 0.03% a year, and has grown to more than $950 billion in assets. This low-cost index fund provides broad exposure to the U.S. economy, making it an attractive option for long-term investors.

Buffett’s own portfolio serves as a testament to the power of a buy-and-hold strategy. He first bought Coca-Cola in 1988, and by 1994, Berkshire had spent $1.3 billion to complete its position. The annual dividend from that investment grew from $75 million in 1994 to $704 million by 2022. The position is now worth around $30 billion and represents about 9% of Berkshire’s portfolio. He never sold.

American Express tells a similar story. Buffett’s interest goes back to the 1960s. Berkshire completed its purchases in 1995 for $1.3 billion. The annual dividends grew from $41 million to $302 million. The position is now worth nearly $46 billion, about 22% of the portfolio. He never sold that either.

Buffett’s point is straightforward: time in the market, combined with low costs, does most of the work. The temptation to trade, rotate, and optimize is usually what gets in the way.

VOO has averaged about 15% annual growth over the past decade. Nobody enjoyed the 2020 crash while it was happening. Or any of the other rough patches in between. But the return is what you get if you didn’t sell, and most of the people who did sell locked in losses they never recovered.

Buffett’s advice to buy and hold isn’t just something he says. It’s how he invested throughout his career at Berkshire Hathaway. He first bought Coca-Cola in 1988. By 1994, Berkshire had spent $1.3 billion to complete its position. The annual dividend from that investment grew from $75 million in 1994 to $704 million by 2022. The position is now worth around $30 billion and represents about 9% of Berkshire’s portfolio. He never sold.

He wasn’t being modest. He was being precise. This is the same man who beat the market by an enormous margin over six decades, and he was saying that for his own wife’s trust, a simple index fund would beat most professional managers.

The data and the bet point in the same direction Buffett has been pointing for decades. VOO isn’t exciting. It doesn’t have a story. It doesn’t have a manager with a track record or a thesis about which sector is about to take off. What it has is broad exposure to the U.S. economy, extremely low cost, and sixty years of evidence from the world’s most successful investor that it’s the right call for most people.

For investors building a long-term portfolio, the data and the bet point in the same direction Buffett has been pointing for decades. VOO isn’t exciting. It doesn’t have a story. It doesn’t have a manager with a track record or a thesis about which sector is about to take off. What it has is broad exposure to the U.S. economy, extremely low cost, and sixty years of evidence from the world’s most successful investor that it’s the right call for most people.