Buffett Backs Low Cost S&P 500 Funds for Long Term Investors

Warren Buffett has repeatedly endorsed low cost S&P 500 index funds as a practical way for investors to gain exposure to the US stock market, citing their broad diversification and lower fees. His investment philosophy, reinforced by a decade long contest against hedge funds and guidance for his estate, emphasizes long term ownership rather than frequent trading or expensive active management.

According to Finance Yahoo's October 9, 2026, report, Buffett previously held shares in the Vanguard S&P 500 ETF, known by its ticker VOO. The fund tracks the S&P 500, an index representing major US companies, and provides exposure to businesses across the economy through a single investment.

In a 2013 shareholder letter, Buffett recommended broad ownership of American businesses through an inexpensive index fund. He wrote, "A low-cost S&P 500 index fund will achieve this goal." His estate instructions also direct a trustee to allocate most of his cash to a similar fund for his wife after his death.

Buffett's approach centers on identifying businesses with long term potential at reasonable prices and holding them over extended periods. However, his guidance also recognizes that investors do not need to select individual winning stocks to participate in the broader market's performance.

The decade long contest that Buffett initiated in 2007 offered a prominent example of his preference for index investing. He wagered $1 million that an S&P 500 index fund would outperform a group of hedge funds selected by Protégé Partners over 10 years, with the measurement period beginning in 2008 and ending in 2017.

According to 247WallSt, Buffett selected the Vanguard 500 Index Fund Admiral Shares, which delivered an average annual return of 7.1%. The five hedge funds of funds selected by Protégé Partners returned an average of 2.2% annually, creating a difference of 4.9 percentage points per year. The prize grew to approximately $2.2 million after a bond rally, and the proceeds went to Girls Inc. of Omaha.

A separate account published by Mercury News reported that the index fund averaged an annual gain of 8.5%, while the five hedge fund portfolios generated annual returns ranging from 0.3% to 6.5%. The publications give different return figures for the index fund, but both describe an outcome in which the S&P 500 investment outperformed the hedge fund selections.

Mercury News also cited Buffett's warning about the economics of investment management. "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients," Buffett said.

The fee structure of the competing hedge fund investments contributed to the challenge. According to 247WallSt, Protégé Partners selected five funds of hedge funds, arrangements in which investors pay a top-level manager that distributes capital among underlying hedge funds. Both levels can charge management fees, while some funds also collect a share of investment profits.

By contrast, index funds track a market benchmark without relying on multiple layers of active management. The 247WallSt report listed VOO's expense ratio at 0.03%, compared with 0.09% for the SPDR S&P 500 ETF Trust, known as SPY. These annual expenses reduce investor returns, although the lowest-cost fund is not guaranteed to outperform every alternative over every period.

The contest also had limitations. Its measurement period began shortly before the 2008 financial crisis and covered a subsequent decade in which large US companies generally benefited from a prolonged market recovery. Hedge funds may sacrifice some gains during rising markets in exchange for strategies intended to reduce losses during downturns, so the results do not establish what the market will return in future years.

Buffett's broader advice includes resisting unnecessary portfolio changes during periods of market volatility. Mercury News reported that he urged investors during the 2008 financial crisis to maintain confidence in the long term prospects of the US economy. He said, "Over the long term, the stock market news will be good," while cautioning that short term market movements cannot be reliably predicted.

His estate planning instructions provide another example of the strategy. Mercury News reported that Buffett directed trustees to place 10% of his cash in short term government bonds and 90% in a very low cost S&P 500 index fund, reflecting his preference for diversified market exposure over higher fee investment management.

Buffett also addressed risk preparation in a 2001 shareholder letter through what he called The Noah Rule. He described the principle as "predicting rain doesn’t count, building an ark does." Mercury News connected that guidance to a survey finding that 47% of Americans said they would struggle to cover living expenses within six months of losing a primary wage earner.

Finance Yahoo reported that Buffett stepped down as Berkshire Hathaway's chief executive at the beginning of 2026 and subsequently left the chairmanship, remaining chairman emeritus and a board member. The company said he would continue to offer his judgment and perspective.