Warren Buffett amassed a huge fortune investing in individual businesses. Sometimes, he led Berkshire Hathaway to acquire businesses outright. Other times, he bought parts of businesses by investing in their stocks.
However, Buffett hasn't always picked individual businesses in recent years. In 2019, he added exchange-traded funds (ETFs) to Berkshire's portfolio. That's proven to be a smart decision, based on the gains those ETFs have delivered since then.
But the picture could soon change. Buffett owns one Vanguard ETF that could be poised to plunge, according to a top Wall Street analyst.
Image source: The Motley Fool.
Buffett's favorite fund
Buffett hasn't pressed the "easy button" by investing heavily in ETFs. Nearly all of Berkshire's $300 billion-plus equity portfolio is still in individual stocks. However, two ETFs remain in the mix.
These ETFs are nearly (although not exactly) identical. Both the SPDR S&P 500 ETF Trust (SPY -1.05%) and the Vanguard S&P 500 ETF (VOO -1.04%) attempt to track the performance of the S&P 500 index (^GSPC -1.11%).
As you might expect, the portfolios of these two ETFs are nearly identical. The main differences between them are their net asset values (the SPDR ETF is bigger) and their annual expense ratios (the Vanguard ETF is cheaper).
Does Buffett have a favorite between the two? I think so. Berkshire owns a little more of the Vanguard ETF than it does of the SPDR ETF. Also, he expressed a preference for Vanguard S&P 500 funds in his 2013 letter to Berkshire Hathaway shareholders.
Ominous predictions
Buffett initiated a position in the Vanguard S&P 500 ETF in the fourth quarter of 2019, and its total return since then exceeds 100%. I suspect the legendary investor is pretty happy with that performance. However, he might need to brace himself for giving up some of those gains.
VOO Total Return Level data by YCharts.
In October, Stifel Chief Equity Strategist Barry Bannister said in an interview with BNN Bloomberg that the S&P 500 will plunge 26% next year. Bannister called the current stock market "effervescent" -- a fancy way of saying it's a bit bubbly. His concerns include valuation and the overall macroeconomic picture.
Stifel isn't the only Wall Street firm with a negative outlook. Earlier this month, Morgan Stanley Chief Global Economist Seth Carpenter told CNBC's Sri Jegarajah that President-elect Trump's proposed across-the-board tariffs could cause a "big negative shock" to the U.S. economy. He argued that the tariffs will drive inflation higher, which will, in turn, weigh on economic growth for the U.S. and its trading partners.
Granted, Carpenter didn't expressly predict a significant downturn for the S&P 500 as Bannister did. However, as the U.S. economy goes, typically so goes the S&P 500 -- although the index tends to move up or down in advance of the economic numbers.
Is the Vanguard S&P 500 ETF really poised to plunge?
If Bannister's prediction is right, the Vanguard S&P 500 (as well as Buffett's other ETF, the SPDR S&P 500 ETF Trust) could plunge in 2025. But will he be proven right? That remains to be seen.
I think it's possible that the promises of deregulation and corporate tax cuts in a second Trump administration could buoy the stock market throughout next year. However, I also suspect that Morgan Stanley is correct to be worried about the impact of tariffs, assuming Trump delivers on his pledge to impose steep tariffs on all imports to the U.S.
The good news is that none of this should matter very much to long-term investors. Stock market cycles come and go. So do presidents and their policies (both good and bad).
Over the long run, the S&P 500 has delivered exceptional total returns and will likely continue to do so. I expect Buffett's favorite Vanguard ETF will, too.
