3 Reasons Why Buying Warren Buffett’s Favorite Stocks Is Smarter Than Investing in an S&P 500 ETF

I’ve long believed that investing in Warren Buffett’s favorite stocks is similar to investing in an exchange-traded fund (ETF). Buffett’s favorite stock, of course, is Berkshire Hathaway (BRK.A -0.17%) (BRK.B -0.15%)the company he has run for decades.

Berkshire Hathaway isn’t as diversified as an S&P 500 ETF, but it’s not far behind. The conglomerate owns more than 60 subsidiaries and holds stakes in more than 40 other publicly traded companies.

I am convinced that buying Berkshire Hathaway stock is smarter than investing in one S&P 500 ETFs. Here are three reasons why.

1. Better performance record

Berkshire Hathaway has arguably outperformed the S&P 500 ETFs. Its year-to-date gain in 2024 is nearly double that of the two most traded S&P 500 ETFs, SPDR S&P 500 ETF Trust (SPY 0.44%) and Vanguard S&P 500 ETF.

More importantly, though, Berkshire handily beat the S&P 500 over the long term. Between 1965 (when Buffett gained control of the company) and 2023, Berkshire’s average annual compound return was 19.8%, compared to just 10.2% for the S&P 500. Its total gain was over 140 times higher than the S&P 500.

Of course, past performance is no guarantee of future returns. However, I suspect that Berkshire will continue to outperform the S&P 500 ETFs over the long term because of Buffett’s process of picking stocks and acquiring businesses. He invests only when he can comfortably predict future earnings and when the current valuation is attractive relative to those future earnings.

Buffett won’t be around forever. His successors may adopt different investment philosophies. I don’t think it will, at least not to a large extent. Berkshire Hathaway shareholders will want continuity with the successful track record that Buffett has established — and I expect they will get it.

2. Lower volatility

Often, when individual stocks outperform the market, those higher gains come with the major downside of higher volatility. However, this is not the case with Berkshire Hathaway. The stock’s beta (a key measure of volatility) over the past five years is 0.87. Any value below 1.0 reflects lower volatility than the overall market.

However, Berkshire’s history of lower volatility goes back well over just five years. For example, in the 2008 financial crisis, in the 2008 financial crisis, stocks fell like most others. But the SPDR S&P 500 ETF Trust fell even more.

BRK.B data by YCharts

It was a similar story during the major market sell-off in early 2020 as a result of the COVID-19 pandemic. While Berkshire shares fell, they weren’t hit as hard as the SPDR S&P 500 ETF Trust.

BRK.B data by YCharts

Sure, Berkshire took a few months longer to recover. However, investors’ maximum draw was still higher with S&P 500 ETFs than with Buffett’s preferred stocks.

I suspect a main reason Berkshire isn’t as volatile as the S&P 500 ETFs is that Buffett always keeps a lot of cash in reserve, while ETFs are always fully invested in stocks. At the end of the second quarter of 2024, Berkshire’s cash, cash equivalents and short-term investments totaled nearly $277 billion. That’s a huge stash of cash that Buffett can put to work if the stock market sinks and makes valuations more attractive.

3. No expense charges

One of the advantages of S&P 500 ETFs is that their annual expense charges are low. The SPDR S&P 500 ETF Trust’s annual expense ratio is 0.0945%, with the Vanguard S&P 500 ETF’s even lower at 0.03%.

But there are no expense fees associated with investing in Berkshire Hathaway stock. Over a long enough period, even small percentages can add up to a significant amount of money. With no expense fees, a stellar track record, low volatility, and significant diversification, I believe investing in Berkshire Hathaway stock is truly smarter than buying an S&P 500 ETF.