I’m listening to Warren Buffett and buying this S&P 500 ETF!

Despite a recent fall in the markets, here’s why I think Warren Buffett’s recommendation of an S&P 500 index fund still makes sense for my portfolio.

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Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

Legendary investor Warren Buffett is a long-time advocator of an S&P 500 index fund for ordinary investors like me. I’ve already invested in a Vanguard S&P 500 ETF, but following the recent fall in the index I’m looking at whether it’s still a good fit for my own portfolio.

Selecting a fund

The Standard and Poor’s 500 is widely considered the most important index in the United States and an essential barometer of US stock market health.

It contains 500 large companies selected by a committee. Firms must have a big enough market capitalisation and have at least 10% of shares outstanding. This is in addition to meeting liquidity and profitability requirements. With companies like Microsoft and Amazon included, this index includes not only the biggest but also possibly the best firms that Wall Street has to offer.

For my own holdings, I believe that buying a low-cost ETF (Exchange Traded Fund) is the easiest way for me to invest in the index. An ETF is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers. In this case, it allows me to invest in the S&P 500 by owning a single share listed on the London Stock Exchange.

There is a myriad of choices in this space and most of the big investment companies offer similar products. Two of the factors I like to use in selecting an ETF are the size and management charge. For my own portfolio, I feel that Vanguard S&P 500 ETF (LSE:VUSA) is the best fit. It’s one of the largest, with over $37bn in assets. It’s also very low cost, with a 0.07% ongoing charge.

Does this S&P 500 ETF still make sense?

The fund is not without its faults. First, as it follows the index, it only includes US companies. Second, in buying it, I can only get the returns of the S&P 500. Perhaps if I can pick the right individual stocks then maybe I can outperform the index.

Indeed, Warren Buffett has made his fortune by picking individual stocks. From Apple alone, it’s estimated that Berkshire Hathaway has made over $100bn in profit already.

During 2021 this ETF increased by around 30%. However, year to date it’s a different story. At the time of writing, this fund is down 8%. That said, most of the stock market is down. Worries about increasing US interest rates and rising Russia-Ukraine tensions continue to drive shares lower.

However, I like to think about the long term and the US index has averaged around 10% per year since 1957. Though nothing is certain in investing, I’m hopeful that in the future we might see something similar. Also, this fund allows me to invest in 500 companies by holding a single share. For me, it’s a low-cost way of diversifying across companies and sectors.

Therefore, as part of a balanced portfolio, I’m happy to follow Warren Buffett’s advice and continue to hold — and maybe buy more of — Vanguard S&P 500 ETF.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Niki Jerath owns shares in Vanguard S&P 500 ETF. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Apple, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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