Warren Buffett took control of Berkshire Hathaway in 1965. It started as a small textile operation but has since become a trillion-dollar company due to Buffett’s knack for investing. Berkshire stock has returned 20% annually for six decades under Buffett’s leadership, while the S&P 500 (^GSPC -0.33%) has added 10.4% annually.
Nevertheless, Buffett has never recommended Berkshire stock, but rather has consistently told investors to stick with a specific index fund. “Over the years, I’ve often been asked for investment advice,” Buffett wrote in his 2016 letter to shareholders. “My regular recommendation has been a low-cost S&P 500 index fund.”
Several investment products satisfy that description, but Buffett has specifically suggested the Vanguard S&P 500 ETF (VOO -0.34%). Following his advice could turn $500 per month into $1 million over 30 years. Here’s what investors should know.
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The Vanguard S&P 500 ETF includes hundreds of popular stocks like Apple, Nvidia, and Tesla
The Vanguard S&P 500 ETF measures the performance of the S&P 500. The fund comprises growth stocks and value stocks from all 11 market sectors, and it covers more than 80% of domestic equities and nearly 50% of global equities by market capitalization. In short, the Vanguard S&P 500 ETF provides exposure to many of the world’s most important companies.
The 10 largest positions in the index fund are listed by weight below:
- Microsoft: 6.8%
- Nvidia: 6.6%
- Apple: 5.9%
- Amazon: 3.9%
- Alphabet: 3.6%
- Meta Platforms: 2.8%
- Broadcom: 2.3%
- Tesla: 1.9%
- Berkshire Hathaway: 1.8%
- JPMorgan Chase: 1.4%
Warren Buffett is an adamant believer in U.S. innovation and commerce, so much so that he has warned investors to “never bet against America.” The S&P 500 is basically a basket of the most influential U.S. companies, which explains why Buffett believes an S&P 500 index fund is the best way for most investors to get exposure to U.S. stocks.
Beyond that, beating the S&P 500 is hard even for experienced investors. More than three-quarters of large-cap funds underperformed the index in the last five years, and nearly 90% underperformed in the last 15 years. Put differently, most professional money managers would be better off buying an S&P 500 index fund rather than individual stocks.
Buffett made that point in his 2014 shareholder letter. “Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades.”
How the Vanguard S&P 500 ETF could turn $400 per month into $1 million
The S&P 500 achieved a total return of 1,860% in the last three decades, meaning the index compounded at 10.4% annually. That period encompasses a broad range of economic and market environments — three recessions, four bear markets, and 12 market corrections — so investors can be reasonably confident in similar returns over the next 30 years.
At that pace, $500 invested monthly in the Vanguard S&P 500 ETF would be worth about $97,400 after one decade, $359,600 after two decades, and a little more than $1 million after three decades.
That last thing prospective investors should know is that the Vanguard S&P 500 ETF has an expense ratio of 0.03%. That means shareholders will pay $3 per year on every $10,000 invested in the index fund. Very few (if any) index funds are more attractive. I say that because the S&P 500 outperformed every other major stock market in the world over the last 20 years. It also beat benchmarks in fixed income, real estate, and precious metals, according to Morgan Stanley.
As a final thought, investors don’t have to choose between individual stocks and an S&P 500 index fund. For instance, I keep some money in the Vanguard S&P 500 ETF and the rest in stocks. My logic is simple: My portfolio will outperform if my stocks beat the S&P 500, but it will still perform reasonably well if my stocks trail the S&P 500 because I have nearly a quarter of my portfolio in the Vanguard S&P 500 ETF.
JPMorgan Chase is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
