Warren Buffett sometimes says he is a business picker and not a stock picker. He’s right, of course. However, the legendary investor does not do that always choose individual companies. Sometimes Buffett chooses a large basket of companies.
I’m talking about Exchange Traded Funds (ETFs). Berkshire Hathaway‘s portfolio. Buffett’s ETFs have been big winners over the years. One of them even turned $10,000 into more than $233,000.
Buffett’s largest profitable ETF
Buffett doesn’t get very creative when selecting ETFs for Berkshire’s portfolio. The conglomerate owns just two funds, and they are virtually identical.
Berkshire owns 39,400 shares of the SPDR S&P 500 ETF Trust (NYSEMKT: SPY)which is currently valued at almost $22.6 billion. It also owns 43,000 shares of the Vanguard S&P 500 ETF (NYSEMKT:VOO)valued at nearly $22.7 billion.
Both ETFs attempt to track the performance of the S&P500. Unsurprisingly, their holdings are virtually identical, with only minor differences in how much each share represents as a total percentage of assets.
Buffett bought these two S&P 500 ETFs in the fourth quarter of 2019. However, they both posted solid gains well before then. The SPDR S&P 500 ETF Trust has been the bigger winner because it was founded much earlier than the Vanguard S&P 500 ETF. An initial investment of $10,000 when the SPDR S&P 500 ETF Trust launched in January 1993 would be worth about $233,320 today. That translates to an average annual return of almost 10.5%.
Five secrets to the success of this ETF
The first and most important secret to the SPDR S&P 500 ETF’s success is time. That is also the most important factor in Buffett’s investment success. Consider that a $10,000 investment in the Vanguard S&P 500 ETF would be worth almost $68,000 when it launched in September 2010. Time is the main reason this total is much lower than the more than $233,000 you would have if you invested in the SPDR ETF.
Another crucial element of the SPDR S&P 500 ETF’s performance is diversification. The fund owns shares of 500 companies spanning multiple sectors and industries.
The third success factor of the ETF is its regular rebalancing. Shares are regularly added to and removed from the fund’s portfolio. The winners stay in while the losers are eliminated. This survival-of-the-fittest aspect of an S&P 500 index ETF is extremely important.
Dividends also play a big role in the SPDR S&P 500 ETF’s total return. Without reinvested dividends, the initial $10,000 investment would be worth approximately $130,560. That’s not a bad return, but it’s a lot less than $233,000.
Finally, the SPDR S&P 500 ETF’s low costs impact its ability to deliver big returns. The ETF’s annual expense ratio is 0.0945%. While that’s higher than the 0.03% expense ratio for the Vanguard S&P 500 ETF, it’s still low compared to many funds.
Could This Buffett ETF Turn $10,000 Back Into Over $233,000?
State Street includes a disclaimer in the fine print of its information about the SPDR S&P 500 ETF Trust: “Past performance is not a reliable indicator of future performance.” This statement is correct. But could this high-flying Buffett ETF turn $10,000 back into more than $233,000? I think it’s possible.
The secrets of the ETF’s past success – time, diversification, rebalancing, dividends and low fees – should enable it to perform well in the future. However, if I had to choose between the two ETFs in Berkshire’s portfolio, I’d go with the Vanguard S&P 500 ETF over the SPDR S&P 500 ETF Trust. The Vanguard ETF’s lower costs should allow it to make slightly more money than the SPDR ETF over the long term.
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Keith Speights has positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool holds positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Meet the Warren Buffett ETF That Turned $10,000 Into Over $233,000, originally published by The Motley Fool