S&P 500 index tracker: World’s best investment?

An S&P 500 index tracker has been recommended by one of the world’s most respected investors, Warren Buffett. It has just got a whole lot easier for South Africans to invest in the US-based S&P 500 index tracker, with the launch of the rand-denominated CoreShares S&P 500 ETF (Exchange Traded Fund). In this article, Biznews explains more about the options when investing in an S&P 500 index tracker and why it is worth adding to a globally diversified portfolio.

By Jackie Cameron

Jackie Cameron

When one of the world’s greatest investors tells you how he plans to keep his wife in the style to which she is accustomed after he is gone, it is worth paying close attention to the details. Warren Buffett, also known as the Sage of Omaha, says he hopes the trustee who takes care of a bequest for his wife’s benefit will put most of the cash into a very low-cost S&P 500 index tracker fund.

In his 2014 annual letter to shareholders, Buffett says he recommends that individuals prioritise keeping investment costs to a minimum. He discourages investors from buying and selling too frequently, because the “frictional costs can be huge”.

An index tracking investment aims to replicate the returns of an index that tracks a basket of securities on a stock market. In this case, the fund is tracking the S&P 500, which represents the performance of the 500 largest companies found on the New York Stock Exchange and the Nasdaq (also in the US). Buffett says his money is where his mouth is and that his advice to the trustee of his wife’s cash “could not be more simple”: put 10% of the cash in short-term (US) government bonds and 90% in a very low-cost S&P 500 index fund. He suggests Vanguard’s index tracker.

Warren Buffett
Warren Buffett

The S&P 500 captures about 80% of the available market capitalisation, says S&P Dow Jones Indices. This means that when you invest in tracking the S&P 500, you are taking a bet on the US economy.

Companies included in the S&P 500 index include: Apple (stock market symbol: AAPL), Exxon (XOM; Google (Goog); Microsoft Corp (MSFT); Johnson & Johnson (JNJ); General Electric (GE);  Wells Fargo & Co (WFC); Chevron Corp (CVX); Proctor & Gamble (PG); and JP Morgan Chase & Co.

There are many S&P 500 trackers. A scan of the options available on Standard Bank Webtrader, an online trading platform offering quick and easy international share investing from South Africa, throws up a list of at least two dozen S&P 500 ETFs.

There are many more available out there in the world. Not all are pure S&P 500 trackers.

Here are some examples of variations on the theme: the Guggenheim S&P 500 Pure Value ETF has value-type shares dominating its basket, including Buffett’s Berkshire Hathaway (BRK/B). The PowerShares S&P 500 High Dividend Portfolio tracks 50 big dividend payers.

And, S&P 500 trackers aren’t only available through US stock exchanges in US dollars. You can buy S&P 500 trackers listed in other stock markets, for example using British pounds for a London Stock Exchange version.

Some trackers use synthetic replication rather than buying the actual shares of the S&P 500. You can get mutual fund trackers, which are unit trust-type investments, as well as Exchange Traded Funds (ETFs) that can be bought as you would shares. Here are some products linked to the S&P 500 as well as the exchanges you can find them on, and ticker codes.

Thankfully, Buffett has taken much of the work of deciding which one is a good bet, by pointing to the Vanguard S&P 500 tracker. So, let’s start with that one.

It is available on the New York, London and Toronto stock exchanges. If you are buying the ETF directly, it is probably easiest to opt for US-listed VOO after converting your rands to dollars.

Vanguard describes this tracker as offering high potential for investment growth. An investment of US$10 000 in 2010 would have been worth more than US$18 000 by early 2014.


But Vanguard does caution that share values rise and fall more sharply than bonds. Vanguard’s S&P 500 tracker is “more appropriate for long-term goals where your money’s growth is essential”, it says.

Importantly – and no doubt why Buffett likes this ETF the most out of all the S&P 500 trackers available to his wife’s trustee – is that the expense ratio of this ETF is 0.05%. Vanguard says on its website that this is 95% lower than the average expense ratio of funds with similar holdings.

With such low costs, it is easy to see why Vanguard has able to match the performance of the S&P 500 very closely (see graph below). Remember to add the cost of holding the ETF, which is roughly 0.20%/year if you opt for do-it-yourself share investing (for more on how to do that, read Time to fire your fund manager? How to build your own global portfolio).

Buffett believes the long-term results will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. If the Vanguard S&P 500 is good enough to  Buffett’s wife, it is surely worth a serious consideration for your portfolio.

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