Warren Buffett Says Buy This Brilliant Vanguard Index Fund -- It Could Turn $450 Per Month Into $940,200
Key Points
Warren Buffett has regularly recommended an S&P 500 index fund as the best way for most investors to get exposure to stocks.
Professional money managers struggle to beat the S&P 500 on a consistent basis, as evidenced by a bet Buffett made in 2007.
The S&P 500 returned 1,820% over the last three decades (10.3% annually), a pace that would turn $450 per month into $940,200.
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Warren Buffett has earned a reputation as one of the greatest investors in American history, but some of his best advice is often overlooked by traders in search of the next great stock.
"In my view, for most people, the best thing to do is to own the S&P 500 index fund," Buffett said at Berkshire Hathaway's shareholder meeting in 2021. Investors have several options, but Buffett himself selected the Vanguard S&P 500 ETF (NYSEMKT: VOO) when going head-to-head with a hedge fund in the early 2000s.
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Following Buffett's advice could turn $450 per month into $940,200. Here's what investors should know.
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The Vanguard S&P 500 ETF provides exposure to many of the most influential companies
The Vanguard S&P 500 tracks the S&P 500 (SNPINDEX: ^GSPC), which measures the performance of 500 large U.S. companies. Included in the benchmark index are value stocks and growth stocks from all 11 stock market sectors. The S&P 500 is usually seen as the best gauge for the overall domestic stock market because it covers about 80% of domestic equities by market value.
However, the S&P 500 also includes approximately 40% of global equities by market value, meaning it provides exposure to many of the most influential companies in the world. Listed below are the top 10 positions in the Vanguard S&P 500 ETF:
- Nvidia: 8.4%
- Apple: 6.8%
- Microsoft: 6.5%
- Alphabet: 5%
- Amazon: 4%
- Broadcom: 2.9%
- Meta Platforms: 2.4%
- Tesla: 2.1%
- Berkshire Hathaway: 1.5%
- JPMorgan Chase: 1.4%
Buffett once bet $500,000 that he could beat a hedge fund with the Vanguard S&P 500 ETF
In 2007, Warren Buffett wagered $500,000 that no professional investor could outperform an S&P 500 index fund over an extended period. He even offered to let the contender select five hedge funds. Only one asset manager accepted the challenge: Buffett went head-to-head with Protégé Partners between 2008 and 2017 -- and Buffett won.
The best-performing Protégé fund returned 88% during that 10-year period, and the worst fund did so poorly that it was dissolved after nine years. Meanwhile, the Vanguard S&P 500 ETF returned 126%, meaning Buffett won the competition by 38 percentage points.
Think about that: With nothing but an S&P 500 index fund, Buffett beat 100-plus financial experts (i.e., each of the five funds was run by a different manager, and each manager invested in many other funds run by other professionals). Yet, those financial experts charge clients exorbitant fees for their services, while the S&P 500 has an expense ratio of just 0.03%, meaning shareholders will pay just $3 annually on every $10,000 in the fund.
How the Vanguard S&P 500 ETF can turn $450 per month into $940,200
The S&P 500 achieved a total return of 1,820% over the last 30 years. It compounded at 10.3% annually during that period. Those decades include such a wide variety of economic and market conditions -- three recessions, three bear markets, and 13 market corrections -- that investors can reasonably assume similar returns over long periods in the future.
At that rate, $450 invested monthly in the Vanguard S&P 500 ETF would be worth $87,300 after one decade, $320,000 after two decades, and $940,200 after three decades, provided dividends are reinvested.
Here's the bottom line: The S&P 500 has consistently produced stellar returns, such that professionals often struggle to beat the index. That makes the Vanguard S&P 500 ETF a good option for almost every investor, even those who prefer individual stocks. You are unlikely to find an index fund with a lower expense ratio and a better track record.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Amazon, Nvidia, 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, 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.
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