Warren Buffett is known as one of the greatest stock pickers of all time. Of course, he would say that he is actually a business picker rather than a stock picker. The endeavors he chooses, however, tend to result in good deeds.
The legendary investor doesn’t just pick individual stocks: he also likes some exchange-traded funds (ETFs). Buffett really likes one ETF in particular. But there’s an equally effective ETF that could help you retire as a millionaire.
Buffett’s Favorite ETF
There are only two ETFs in Berkshire HathawayIt is (NYSE:BRK.A) (NYSE:BRK.B) wallet: the SPDR S&P 500 ETF Trust (NYSE:SPY) and the Vanguard 500 ETF Index Fund (NYSEMKT: VOL). Both are index ETFs that track the S&P500.
Which of these two funds is Buffett’s favorite fund? I think the evidence points to the Vanguard 500 Index Fund ETF.
For one thing, Berkshire owns slightly more of the Vanguard ETF than it does of the SPDR S&P 500 ETF Trust. At the end of the third quarter, the conglomerate’s stake in VOO was worth just over $17.5 billion, while its position in SPY was worth less than $17.5 million.
Buffett also appeared to express his opinion in his 2013 letter to Berkshire Hathaway shareholders. In that letter, he wrote that he had requested in his will that most of his family’s inherited wealth be invested in a low-cost S&P 500 index fund. He added: “I suggest the Vanguard one.”
An equally good alternative
Why would Buffett choose the Vanguard fund over another that held the same stocks? Cost. Vanguard is well known for its low annual fees. In that 2013 letter, he stressed the importance of “keeping your costs to a minimum.”
VOO certainly beats SPY on this front. The Vanguard fund annual report spending rate is only 0.03%, compared to 0.0945% for the SPDR ETF.
However, in terms of cost, there is another alternative that is just as interesting as VOO. black rockIt is iShares Core S&P 500 ETF (NYSEMKT:IVV) also tracks the S&P 500. Its expense ratio is also 0.03%.
There are only two significant differentiators between these two ETFs. One is the average trading volume. VOO’s average volume is around 4.8 million shares, while IVV’s is just under 5 million shares.
The other is assets under management (AUM). VOO’s assets under management are approximately $937 billion, compared to IVV’s nearly $397 billion. None of these differences should matter to long-term investors, however.
You can retire as a millionaire with either ETF
Buffett told Berkshire Hathaway shareholders about a decade ago that any investor who owns a broad and diversified basket of stocks through an S&P index fund is “destined to do well” over time. He was right.
It is possible to retire as a millionaire by investing in VOO or IVV. For example, let’s say you invest $5,350 per year in either ETF for 30 years. If the The S&P 500 offers the same average annual return by 10.7% as it has over the past 30 years, you would end the period with just over $1 million.
The low expense ratio for VOO and IVV would not matter significantly to your total returns. Taxes could be a factor, however. However, investing in a tax-sheltered account, such as an IRA or 401(k)would solve this problem.
Of course, there is no guarantee that the S&P 500 will provide the same level of returns in the future as it has in the past. However, investing in VOO or IVV regularly over a long period of time will likely be very profitable.
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Keith Speights holds positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Warren Buffett really likes 1 ETF. Here’s an equally successful ETF that could help you retire as a millionaire. was originally published by The Motley Fool
