ETFs for Warren Buffett’s Hot List

Oracle of Omaha’s latest shareholder letter outlines which ETFs he might put into a portfolio

Warren Buffet in February 2014, before he released his annual shareholder letter (Photo: AP). Warren Buffet in February 2014, before he released his annual shareholder letter (Photo: AP).

What ultra-hot investments is the world’s greatest investor, Warren Buffett, recommending right now? Bitcoin? High-tech venture capital? Vintage Ferraris? Marijuana stocks?

Buffett’s most recent letter to Berkshire Hathaway shareholders gives us a clue: “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. My advice to the trustee could not be more simple.

“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, individuals – who employ high fee managers,” he added. 

Since the vast majority of ETFs are linked to market indexes, Buffett’s advice to buy plain-vanilla index funds is a friendly invasion of sorts. 

Three Key Plays

Three ETFs tracking the S&P 500 that carry annual expenses under 0.10% and would match Buffett’s description of low cost are the iShares Core S&P 500 (IVV, 0.07%), the SPDR S&P 500 ETF (SPY, 0.09%), and the Vanguard S&P 500 ETF (VOO, 0.05%).

For exposure to short-term government bonds, two good choices are the iShares 1-3 Yr Treasury Bond ETF (SHY, 0.15%) or the Schwab Short-Term U.S. Treasury ETF (SCHO, 0.08%).

The difference between investing in a government bond ETF versus government bonds directly is a matter of preference.

Unlike actual bonds that mature and repay your principal, the typical government bond ETF never matures. Rather, they ride out changes in interest rates by increasing in value when rates fall and decreasing in value when rates rise.

Although Buffett’s advice of a 90/10 equity/bond portfolio won’t be appropriate for most clients, the advice to invest simply and efficiently is applicable. 

Adding exposure to other major asset classes via low-cost index ETFs like global real estate (RWO), global treasury inflation protected securities (GTIP), and commodities (GCC) can help to further diversify risk. From decades of experience, Warren Buffett knows that hand-picking individual stocks that consistently beat the market is difficult for individual and professional investors alike and that’s why he doesn’t recommend it.  

“The goal of the non-professional investor should not be to pick winners - neither he nor his ‘helpers’ can do - but should rather be to own a cross-section of businesses that in aggregate are bound to do well.”

Warren Buffett likes indexing, now go tell your clients.

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