Warren Buffett Has Recommended This 1 Investment for Decades. History Says He's Been Right Every Single Time.

Warren Buffett is considered one of the greatest investors of all time. However, even he believes that one of the smartest investments someone can make is in an exchange-traded fund (ETF) that tracks the S&P 500 index, like the Vanguard S&P 500 ETF (NYSEMKT: VOO).

In fact, back in 2007, Buffett offered hedge fund managers a $500,000 bet that the S&P 500 index would outperform hedge funds over the next decade. Only one manager, Ted Seides, a former co-manager of Protégé Partners, took him up on his offer. Buffett invested in a low-cost index fund, while Seides chose a group of hedge funds.

Buffett's bet won in a landslide, and the money was eventually donated to charity. The Oracle of Omaha said he was willing to make another active-versus-passive investing bet, though it doesn't appear anyone took him up on it. Three years after the bet concluded, Buffett said at Berkshire Hathaway's 2020 annual meeting that "for most people, the best thing to do is own the S&P 500 index fund."

A core holding

While I don't agree with Buffett on everything, one thing I do wholeheartedly believe is that an S&P 500 index fund should be a core holding for most investors. The Vanguard S&P 500 ETF, meanwhile, is a great choice, as it has a minuscule expense ratio of just 0.03%. This means investors are paying only $0.30 in expenses for every $1,000 they invest, effectively letting them keep virtually all of the fund's returns.

The Vanguard S&P 500 ETF is also a great vehicle to dollar-cost average into over the long term. The ETF gives investors a portfolio of about the 500 largest publicly traded companies in the U.S., and since the index is market-cap weighted, the larger the company (share price multiplied by shares outstanding), the larger its position in the ETF.

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Only about 14% of actively managed large-cap funds have beaten the S&P 500 over the past decade, and the main reason is that market-cap-weighted indexes let their winners run and their losers fade. It's an exercise in survival of the fittest and goes against how most active managers operate, who tend to double down on their losers and take profits on their winners.

Invest consistently in the Vanguard S&P 500 ETF, which has generated an average annual return of over 15% over the past decade, and you'll be well on your way to creating long-term wealth.

Geoffrey Seiler has positions in 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.