Warren Buffett has served as the CEO of Berkshire Hathaway since 1965. He oversees a portfolio of 45 publicly traded stocks and securities worth $316 billion, plus a $277 billion cash pile and several private, wholly owned businesses.
Under Buffett's leadership, Berkshire stock has delivered a compound annual return of 19.8% over the last 59 years, which could have turned an investment of $1,000 into more than $42 million.
However, Buffett and his team are expert stock pickers who manage Berkshire's investment portfolios full time. He knows the average investor would struggle to replicate his returns, so he recommends they buy exchange-traded funds (ETFs) to track the performance of an index like the S&P 500 instead.
In fact, Berkshire actually holds two S&P 500 index funds in its portfolio: the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). One top analyst on Wall Street predicts the S&P 500 will hit 15,000 by 2030, and if he's right, those index funds could deliver a return of 158% from here!
The S&P 500 is home to the highest-quality stocks
The S&P 500 is an index of 500 companies from 11 different sectors of the U.S. economy, so it's highly diversified. It has a very strict entry criteria and only the highest-quality names make the cut. Among other things, companies must be worth at least $18 billion, and they must be profitable based on the sum of their earnings per share over the most recent four quarters.
Even then, admission is at the discretion of a special committee that rebalances the index on a quarterly basis.
The S&P 500 is weighted by market capitalization, which means the largest companies in the index have a greater influence over its performance than the smallest. As a result, it's no surprise the technology sector has a 32.2% weighting, considering it's home to all six of America's trillion-dollar companies.
Below are the top five holdings in the S&P 500 and their individual weightings:
Stock | S&P 500 Weighting |
|---|---|
1. Apple | 7.13% |
2. Nvidia | 6.79% |
3. Microsoft | 6.33% |
4. Amazon | 3.57% |
5. Meta Platforms | 2.61% |
Data source: State Street Global Advisors. S&P 500 weightings are accurate as of Oct. 10, 2024, and are subject to change.
Each of the above five companies is developing artificial intelligence (AI) in some capacity, and given the sheer value of that emerging industry, they are likely to continue leading the S&P 500 higher from here.
Vanguard ETF vs. SPDR ETF: Which should you buy?
Investors can't really go wrong buying either one. Both are designed to directly track the performance of the S&P 500, so there shouldn't be a big difference in their returns.
However, the Vanguard ETF does have an edge because of its extremely low cost. It has an expense ratio of just 0.03%, which is the proportion of the fund deducted each year to cover management costs. The SPDR ETF is over three times as costly to own with an expense ratio of 0.0945%.
For that reason, the Vanguard ETF has delivered slightly better returns over time, because it's able to track the performance of the S&P 500 more closely after fees are deducted:
Fund/Index | Compound Annual Return (Last Three Years) | Compound Annual Return (Last Five Years) | Compound Annual Return (Last 10 Years) |
|---|---|---|---|
S&P 500 | 11.91% | 15.98% | 13.38% |
Vanguard ETF | 11.88% | 15.93% | 13.33% |
SPDR ETF | 11.78% | 15.82% | 13.23% |
Data source: Vanguard, State Street Global Advisors.
The S&P 500 could be poised for 158% upside by 2030
Investors should take every Wall Street forecast with a grain of salt because analysts don't always get things right. But Tom Lee from Fundstrat Global Advisors has made some remarkable S&P 500 forecasts over the last couple of years.
Lee predicted the index would hit 4,750 in 2023 (while many other analysts were bearish), and it ended the year at 4,769. He came into 2024 expecting the index to hit 5,200, then he increased his target to 5,500, and then increased it again to 5,700 -- all three levels have now been surpassed.
Lee recently issued a long-term forecast for the S&P 500, predicting it could reach 15,000 by 2030. That implies a whopping 158% upside from here, which is the return investors can expect in the Vanguard and SPDR ETFs if he's right.
Will Tom Lee be right?
Tom Lee says the S&P 500 will benefit from a big demographic tailwind as we approach 2030, because millennials and Gen Zers will be entering the prime period of their lives (between 30 and 50 years of age). That's when people typically earn the most money, and when they make important life decisions like investing.
Lee also points to AI as a potential driver of stock market returns. He says the global workforce could be short 80 million workers by 2030, which will direct more investment dollars into technologies like AI to drive automation.
For the S&P 500 to hit 15,000 by 2030, it will have to grow at a compound annual rate of 16.6% over the next six years. That's much higher than its compound annual return of 10.5% since it was established in 1957, but it's only marginally higher than its average return over the last five years, as we explored earlier.
If hypergrowth themes like AI continue to dominate the S&P 500 as they have for the last couple of years, there is a good chance Lee will be right. But even if the index doesn't hit 15,000 by 2030, history suggests it will get there eventually, so it's never a bad time for investors to buy an S&P 500 index fund as Warren Buffett recommends.
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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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool 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.
Warren Buffett Owns 2 Index Funds That Could Soar 158%, According to a Top Wall Street Analyst was originally published by The Motley Fool