Warren Buffett is the CEO of Berkshire Hathaway, a holding company with a $296 billion portfolio of publicly traded stocks and securities, in addition to several wholly-owned subsidiaries. It also has a $325 billion pile of cash, which Buffett and his team can deploy when they find new opportunities.
Since Buffett became CEO in 1965, Berkshire stock has delivered a compound annual return of 19.8%, crushing the average annual gain of 10.4% in the S&P 500 (^GSPC 0.16%) over the same period.
Buffett is a full-time investing professional, so he knows the average retail investor would struggle to replicate his success. That's why he often recommends they buy exchange-traded funds (ETFs) instead of picking individual stocks. Berkshire actually holds two of them in its portfolio: The Vanguard S&P 500 ETF (VOO 0.14%), and the SPDR S&P 500 ETF Trust (SPY 0.15%).
Both funds directly track the performance of the S&P 500, and according to a recent forecast by a top Wall Street analyst, investors who buy either of them today could earn a 153% gain by 2030.
Image source: Getty Images.
S&P 500 index funds are great for investors of all skill levels
The S&P 500 is the most diversified of the major U.S. stock market indexes. It features 500 companies from 11 different sectors of the economy, and it has a very strict entry criteria. To qualify for inclusion, companies must have a market capitalization of at least $20.5 billion, and they must be profitable over the most recent 12-month period.
Even then, a special committee meets once per quarter to decide which companies will make the cut, ensuring only the highest-quality names are included.
The Vanguard ETF and the SPDR ETF track the performance of the S&P 500 by holding the same stocks and maintaining similar weightings. They are practically identical except for their expense ratios, which measure the proportion of each fund deducted every year to cover management costs.
The Vanguard ETF has an expense of just 0.03%, so a $10,000 investment will incur annual fees of $3. The SPDR ETF, on the other hand, has a slightly higher expense ratio of 0.0945%, meaning a $10,000 investment will incur annual fees of $9.45.
The difference is negligible over the long term, but it might be a good enough reason to pick the Vanguard ETF, especially if you're investing a large sum of money.
Tech stocks like Nvidia, Apple, and Microsoft make up a big portion of the S&P 500
The information technology sector is the largest in the S&P 500, representing 32.9% of its total value. That's because the index is weighted by market capitalization, which means its largest holdings have a greater influence over its performance than the smallest.
Apple, Nvidia, and Microsoft each have a market cap of over $3 trillion, making them the largest companies in the world. As a result, they are the top-three holdings in the S&P -- and each of them happens to be in the information technology sector.
|
Stock |
S&P 500 Weighting |
|---|---|
|
1. Apple |
7.32% |
|
2. Nvidia |
7.24% |
|
3. Microsoft |
6.29% |
Data source: State Street. Portfolio weightings are accurate as of Jan. 6, and are subject to change.
But the S&P 500 isn't all about technology -- even Buffett's own Berkshire Hathaway is among its top 10 holdings. Investors will also find the world's largest investment bank, JPMorgan Chase, in the index, as well as Visa, Costco Wholesale, Walmart, Coca-Cola, and more.
Image source: Getty Images.
Potential upside of 153% by 2030
Investors should never make decisions based solely on the word of Wall Street analysts, because they don't always get things right. But Tom Lee from Fundstrat Global Advisors made some very accurate predictions for the S&P 500 over the last two years, so it's worth paying attention to his forecasts.
He predicted the index would hit 4,750 in 2023 when most other analysts were cautious, and it closed the year at 4,769. The S&P also surpassed four of his price targets in 2024 (5,200, 5,500, 5,700, and 6,000). But he is human -- he swung for the fences one last time in December by predicting the index could hit 6,300 by year-end, which didn't quite work out.
Lee also issued a long-term forecast for the S&P last year. He thinks the index will climb to 15,000 by 2030, which implies an upside of 153% from where it trades as of this writing. That's the return investors can expect from the Vanguard ETF and the SDPR ETF if he's right.
Lee believes artificial intelligence (AI) will contribute to the upside, because companies could pour trillions of dollars into subsegments like machine learning and automation to solve global workforce shortages over the next few years.
Further, he says millennials and Gen Zers are about to enter the prime period of their careers (between the ages of 30 and 50), which is when people earn the most money and make major life decisions like investing. That could be a tailwind for the S&P 500.
But every forecast comes with risks. AI could fail to live up to expectations, causing companies like Nvidia and Microsoft to lose significant amounts of value, which would be a drag on the S&P 500. A deep economic recession, or even another pandemic, could also disrupt the index on its journey to 15,000, adding years to Lee's target timeframe.
With that said, history suggests the S&P 500 is likely to reach 15,000 eventually. Even if it doesn't happen by 2030, investors probably won't regret taking Buffett's advice by buying the Vanguard ETF or SPDR ETF today.
