Warren Buffett has a passion for investing in shares, but he doesn’t advocate that every investor should mimic his actions. In truth, this investing legend from Omaha suggests that it might be more advantageous for many individuals to put their money into investment funds instead of single stocks.
His argument is that thorough research is necessary to fully comprehend businesses before investing, as it involves putting money at risk. However, exchange-traded funds (ETFs) hold numerous shares, reducing the need for extensive research. Plus, they can be easily bought and sold in a manner similar to trading stocks.
Although numerous Exchange-Traded Funds (ETFs) exist in the market, Buffett has a particular fondness for one. However, there’s an obvious explanation as to why not even Buffett is purchasing his preferred ETF at this moment.
Buffett’s favorite ETF
What is Buffett’s favorite ETF? He has provided three big clues in the past.
The first hint was found in Warren Buffett’s letter to shareholders of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in 2013. He suggested that amateurs should not aim to pick successful companies, as neither they nor their advisors have this ability. Instead, the advice was to own a diverse collection of businesses, and over time, these will likely perform well. A low-cost fund that tracks the S&P 500 would be an effective way to accomplish this objective.
In the same shareholder letter, Buffett’s second tip was clearly stated. He made it clear that upon his death, 90% of the cash his family will inherit is to be invested in a low-cost S&P 500 index fund, specifically suggesting Vanguard’s.
For the third clue, it’s worth noting that Buffett’s Berkshire Hathaway portfolio contains only two ETFs in recent times. One of them is the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). The other one is the Vanguard S&P 500 ETF (VOO), which has a slightly lower annual expense ratio compared to the SPDR ETF.
Can you figure out which one of these two S&P 500 index funds received a larger portion of Berkshire’s cash? If your answer is correct, give yourself a pat on the back! It seems that the Vanguard ETF was indeed Buffett’s preferred choice. The hints provided make it apparent that the Vanguard S&P 500 ETF was likely Buffett’s favorite ETF.
Why he isn’t buying it
In Q4 of 2024, Berkshire Hathaway liquidated its entire holding in the Vanguard S&P 500 ETF. This included selling off all shares of the SPDR S&P 500 ETF Trust during that period. Moreover, since then, Warren Buffet, the renowned investor, has not purchased a single share of his preferred ETF.
It appears to me that Buffet hasn’t had a change of heart regarding the astuteness of investing in S&P 500 index funds. Moreover, it seems unlikely that he now views the Vanguard S&P 500 ETF as an unwise long-term choice for investors. The question arises, then, why isn’t Buffet buying his preferred ETF? I suspect the obvious answer is valuation.
As an ardent observer of the financial world, I find the Buffett Indicator, a metric that sheds light on the potentially alarming valuation of the Vanguard S&P 500 ETF and the broader stock market, particularly intriguing. This indicator calculates the total market capitalization of all U.S. stocks as a proportion of U.S. Gross Domestic Product (GDP), named after the legendary investor, Warren Buffett himself.
20 years ago, I remember reading in Fortune magazine that when the Buffett Indicator hits a figure close to 200%, it’s like playing with fire. Well, today, this indicator stands at an astonishingly high 209%. Now, this metric utilizes the Wilshire 5000 index, which encompasses all U.S. stocks. However, it’s important to note that the S&P 500 alone makes up about 80% of the total market cap of U.S. stocks. So, as an ardent investor, I find myself wondering if it’s time to tread cautiously given these eye-catching numbers!
Should you buy this ETF even though Buffett isn’t?
Warning from Buffett about “dabbling with danger” resonates strongly within me. Similarly, his recommendation in the 2013 Berkshire Hathaway annual letter to invest in stocks as if you’re buying a farm also sticks. Just like I wouldn’t purchase a farm when land prices were sky-high, especially if I thought they could drop soon, I’d be hesitant to invest heavily in stocks at their current highs if I believed a price decrease was imminent.
Investing in the Vanguard S&P 500 ETF at this moment might not be a significant error, especially when considering a long-term perspective. I find it unlikely that the S&P 500 and its corresponding ETFs won’t be worth more two decades from now compared to their current values.
Buffett cautioned about a risk that’s worth considering: “The primary hazard is that inexperienced or hesitant investors might invest when there’s excessive enthusiasm and later feel disheartened upon experiencing paper losses.” If you fear you may be tempted to sell the Vanguard S&P 500 ETF should it experience significant declines, it’s advisable not to invest in it.
Alternatively, Buffett proposed a remedy for this possible issue. He advocated for gradually acquiring shares and refraining from selling during unfavorable news or significant declines. If you adhere to these guidelines, Buffett contended, you’re almost guaranteed to achieve favorable outcomes.
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2025-07-19 13:39