Warren Buffett sometimes says he’s a “business-picker” and not a stock-picker. He’s right, of course. However, the legendary investor doesn’t always pick individual businesses. Sometimes, Buffett picks a large basket of businesses.

I’m referring to the exchange-traded funds (ETFs) in Berkshire Hathaway‘s portfolio. Buffett’s ETFs have been big winners over the years. One of them even turned $10,000 into over $233,000.

Buffett’s biggest moneymaking ETF

Buffett doesn’t get very creative when selecting ETFs for Berkshire’s portfolio. The conglomerate owns only two funds — and they’re nearly identical.

Berkshire owns 39,400 shares of the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), which is currently valued at nearly $22.6 billion. It also owns 43,000 shares of the Vanguard S&P 500 ETF (NYSEMKT: VOO), valued at nearly $22.7 billion.

Both ETFs attempt to track the performance of the S&P 500. Unsurprisingly, their holdings are nearly identical, with only minor differences in how much each stock makes up as a total percentage of assets.

Buffett bought these two S&P 500 ETFs in the fourth quarter of 2019. However, they were both racking up solid gains well before then. The SPDR S&P 500 ETF Trust has been the bigger winner because it was created much earlier than the Vanguard S&P 500 ETF. An initial investment of $10,000 when the SPDR S&P 500 ETF Trust launched in January 1993 would be worth roughly $233,320 today. That translates to an average annual return of nearly 10.5%.

Five secrets to this ETF’s success

The first and most important secret to success for the SPDR S&P 500 ETF is time. That’s also the most important factor in Buffett’s investing success, by the way. Consider that a $10,000 investment in the Vanguard S&P 500 ETF at its inception in September 2010 would be worth close to $68,000. Time is the key reason this total is much lower than the over $233,000 you’d have from investing in the SPDR ETF.

Another critical element of the SPDR S&P 500 ETF’s performance is diversification. The fund owns shares of 500 companies that span multiple sectors and industries.

The third success factor of the ETF is its regular rebalancing. Stocks are frequently added and dropped from the fund’s portfolio. The winners stay in while the losers are eliminated. This survival-of-the-fittest aspect of an S&P 500 index ETF is enormously important.

Dividends also play a huge role in the SPDR S&P 500 ETF’s total returns. Without dividends reinvested, the initial investment of $10,000 would be worth around $130,560. That’s not a bad return, but it’s a lot less than $233,000.

Story continues

Finally, the SPDR S&P 500 ETF’s low costs affect its ability to achieve great returns. The ETF’s annual expense ratio is 0.0945%. While that’s higher than the expense ratio of 0.03% for the Vanguard S&P 500 ETF, it’s still low relative to many funds.

Could this Buffett ETF turn $10,000 into over $233,000 again?

State Street includes a disclaimer in the fine print of its information about the SPDR S&P 500 ETF Trust: “Past performance is not a reliable indicator of future performance.” This statement is correct. But could this high-flying Buffett ETF turn $10,000 into over $233,000 again? I think it’s possible.

The secrets to the ETF’s past success — time, diversification, rebalancing, dividends, and low costs — should enable it to perform well in the future. However, if I had to choose between the two ETFs in Berkshire’s portfolio, I’d go with the Vanguard S&P 500 ETF instead of the SPDR S&P 500 ETF Trust. The lower cost of the Vanguard ETF should allow it to make a little more money than the SPDR ETF over the long run.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,266!*

• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,047!*

• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $389,794!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 7, 2024

Keith Speights has positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

Meet the Warren Buffett ETF That Turned $10,000 Into Over $233,000 was originally published by The Motley Fool