Investing $1,000 in any investment is a significant commitment, with the obvious goal of maximizing your return and minimizing your losses. A great way to do this is with an exchange-traded fund (ETF), which allows you to buy shares as you would stocks and can be purchased with small amounts of money.
If you have $1,000 to invest right now, there are very good reasons why the money should go into an ETF that tracks the S&P 500. Here’s why and which S&P 500 ETF is one of the best to own.
Billionaire investor and CEO of Berkshire Hathaway Warren Buffett has just two S&P 500 ETFs in his company’s $325 billion investment portfolio, and the largest is the Vanguard S&P 500 ETF (NYSEMKT:VOO). Buffett’s company currently owns 43,000 shares of the Vanguard S&P 500 ETF, a small position compared to its other holdings, but it has made its support for funds that track the S&P 500 very clear.
“In my opinion, for most people, the best thing they can do is own the S&P 500 index fund,” Buffett said at Berkshire Hathaway’s 2020 annual meeting.
Buffett also said at Berkshire’s 2013 annual meeting that almost all of the investment assets he will leave to his wife will be in an index fund when he dies. He said: “My advice to the manager couldn’t be simpler: put 90% of the money in a very low-cost S&P 500 index fund (I suggest the one from Vanguard).”
Index funds have become a popular investment vehicle because they are hard to beat. The Vanguard S&P 500 ETF is passively managed, meaning that money invested in the fund is used to buy shares of companies in the S&P 500 index without attempting to focus on picking specific winners.
Not only is this easier than trying to figure out which stock will outperform the market, but this strategy often generates better returns. Investigation of morning star shows that only 29% of actively managed funds outperformed their passively indexed peers over the past decade.
If a fund is “passively managed,” you may think it won’t be able to make significant gains, but that’s not true. The Vanguard S&P 500 ETF has had a total return of 257% over the last decade.
Another great benefit of this particular ETF is that it has a very low expense ratio fee of only 0.03%. That means if you invest $1,000, you’ll pay just $0.30 in fees, and $10,000 invested in the fund will cost you just $3.
The S&P 500 has had a historical average annual rate of return of 10.1% since 1957. Some years it will be more and some years it will be less, of course. Furthermore, these returns do not take inflation into account.