Warren Buffett is the CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), where he oversees a $299 billion portfolio of publicly traded stocks and securities. The investment conglomerate also wholly owns several private businesses, and it has a $325 billion cash pile, which Buffett and his team can put to work when they spot new opportunities.
Since Buffett became CEO in 1965, his investment decisions have contributed to a compound annual return of 19.8% in Berkshire stock. The S&P 500 (^GSPC -2.95%) delivered an average annual return of 10.3% over the same period, so Berkshire is crushing the broader market.
Buffett is a full-time investing professional. He knows average retail investors would struggle to replicate his success, so he often recommends they buy exchange-traded funds (ETFs) instead. Berkshire actually holds two of them in its portfolio: The Vanguard S&P 500 ETF (VOO -2.94%) and the SPDR S&P 500 Investment Trust.
Both funds directly track the performance of the S&P 500, but the Vanguard ETF might be the better choice because of its lower cost. According to a forecast from a top Wall Street analyst, investors who buy the ETF today could earn a whopping 147% gain by 2030.
Image source: The Motley Fool.
A great ETF for long-term investors of all skill levels
The S&P 500 has very strict entry criteria. Companies must be profitable on a trailing 12-month basis to qualify for inclusion, and their market capitalization must be at least $18 billion. Even then, a special committee meets once per quarter to decide which companies should be included, which ensures that only the highest-quality names make the cut.
Since the S&P is home to 500 companies from 11 different sectors, it’s the most diversified of the major U.S. stock market indexes. The Vanguard S&P 500 ETF holds the same stocks and maintains similar weightings, which is how it tracks the performance of the index.
The ETF has an expense ratio of just 0.03%, which is the proportion of the fund deducted each year to cover management costs. It’s one of the cheapest ETFs in the world. In comparison, the SPDR S&P 500 Investment Trust has an expense ratio of 0.09%, which makes it three times more expensive to own. A higher expense ratio can detract from investors’ returns over the long run.
Exposure to tech giants like Nvidia, Apple, and Microsoft
The S&P 500 is weighted by market capitalization, so the largest companies in the index have a greater influence over its performance than the smallest do. Since the information technology sector is home to more trillion-dollar companies than any other, it has a weighting of 31.3%, which is the highest in the S&P 500.
The three largest companies in the S&P 500 have a combined market capitalization of $10.4 trillion, and each of them is in the information technology sector:
|
Stock |
Vanguard S&P 500 ETF Portfolio Weighting |
|---|---|
|
1. Apple (NASDAQ: AAPL) |
7.06% |
|
2. Nvidia (NASDAQ: NVDA) |
6.66% |
|
3. Microsoft (NASDAQ: MSFT) |
6.16% |
Data source: Vanguard. Portfolio weightings are accurate as of Nov. 30, 2024, and are subject to change.
Those three companies have different business models, but they’re all betting big on artificial intelligence (AI). Apple recently launched its Apple Intelligence software for users of the latest iPhones, iPads, and Mac computers. It unleashes new writing tools that can instantly summarize emails and text messages, and it can even proofread or rewrite outgoing text content. Apple Intelligence also empowers the Siri voice assistant with new capabilities, thanks to an integration with OpenAI‘s ChatGPT software.
Nvidia, on the other hand, is the leading supplier of graphics processors (GPUs) for the data center, which are used in AI development. The company just started shipping its highly anticipated Blackwell chips, which will help businesses build and deploy the most advanced AI models to date. Blackwell sales are expected to ramp up significantly in 2025, which is why I think Nvidia will be a top-performing stock next year.
Microsoft is investing heavily in everything from AI data centers to software applications. The company’s Azure cloud platform is now a go-to destination for developers seeking computing capacity and ready-made large language models (LLMs) to build their own AI software.
But the S&P 500 isn’t all about tech. The index holds Berkshire Hathaway stock, and a number of other prominent non-technology stocks like JP Morgan Chase, Eli Lilly, Visa, Costco, Walmart, and more.
Image source: Getty Images.
Potential upside of 147% by 2030
Wall Street doesn’t always get things right, so investors should never hang their hats on the word of any analyst. But Tom Lee from Fundstrat Global Advisors made some incredibly accurate predictions for the S&P 500 over the last couple of years, so it’s worth keeping his forecasts in mind.
He said the S&P 500 would rise to 4,750 in 2023 while most other analysts were cautious, and the index closed the year at 4,769. The S&P 500 has also surpassed four of his 2024 targets (5,200, 5,500, 5,700, and 6,000) already. He swung for the fences one last time earlier this month, saying the S&P 500 could hit 6,300 by year-end. With two weeks left, it will need to rise by another 3.7% to get there.
But Lee came out with a long-term target for the S&P 500 earlier this year, predicting it will hit 15,000 by 2030. That implies an upside of 147% from where it trades today, which is the return investors can expect from the Vanguard S&P 500 ETF if he’s right.
Lee says millennials and Gen Zers are about to enter the prime period of their careers (between ages 30 and 50). That’s when people usually earn the most money and make big life decisions like investing, which could be a tailwind for the S&P 500.
Lee also believes AI will contribute to the potential upside. Companies are likely to pour trillions of dollars into machine learning and automation to solve global workforce shortages in the coming years, which could drive a productivity boom.
Of course, there are risks to Lee’s forecast. A global economic shock like another pandemic or a financial crisis could delay the S&P 500 on its journey to 15,000 by several years. Plus, AI might fail to live up to the hype, which would cause companies like Nvidia to lose significant amounts of their value.
But even if the S&P 500 doesn’t reach 15,000 by 2030, history suggests it’s likely to get there eventually. As a result, investors should consider taking Warren Buffett‘s advice and buy the Vanguard S&P 500 ETF for the long term anyway.