Warren Buffett Loves This Low-Cost ETF. History Says It Could Turn $200 per Month Into $1 Million.

Where does Warren Buffett want most of the money his family receives as an inheritance to be invested? Perhaps surprisingly, it isn’t Berkshire Hathaway (BRKA +0.22%) (BRKB +0.17%). It isn’t one of the top holdings in Berkshire’s portfolio, either.

Instead, Buffett revealed years ago where he thought the inheritance should be invested. He recommended to his estate’s trustee, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”

One exchange-traded fund (ETF) satisfies Buffett’s criteria to a T — the Vanguard S&P 500 ETF (VOO +0.32%). Berkshire owned this fund from 2019 through 2024. History shows that regular investors should love the Vanguard S&P 500 ETF as much as Buffett does.

From $200 per month to $1 million

You might find this hard to believe, but investing $200 per month in the Vanguard S&P 500 ETF could grow to $1 million if history is any guide. The math is straightforward.

The S&P 500 index that the ETF tracks has delivered an average annual total return of roughly 10.7% with dividends reinvested since its inception in 1957. If you invested $200 per month and achieved that average total return, you’d have roughly $1 million after 37 years.

Granted, 37 years sounds like a long time. However, it isn’t an unreasonable amount of time to invest. For example, a person who began their career at age 23 and put $200 per month into the Vanguard S&P 500 ETF could have around $1 million saved by age 60 — good timing for getting ready to retire.

We can’t overlook the importance of reinvesting dividends. Over the last 100 years, around one-third of the S&P 500’s and its predecessors’ total returns have resulted from these reinvestments.

Why Buffett loves this approach

Buffett loves investing in a low-cost S&P 500 fund like the Vanguard S&P 500 ETF because he knows it works. He also believes that most investors don’t spend enough time studying individual businesses to project their earnings accurately and are better off sticking with index funds.

The “Oracle of Omaha” wrote in his 2013 letter to Berkshire Hathaway shareholders, “The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ [a reference to financial advisors] can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well.” He believed that a low-cost S&P 500 index fund would achieve the goal.

Buffett even thinks that S&P 500 funds can beat most investment managers. In 2007, he bet $1 million that a low-cost S&P 500 index fund would outperform hedge fund managers over 10 years. He won that bet.

No guarantees, but strong odds

To be sure, there’s no guarantee investing $200 per month in the Vanguard S&P 500 ETF will grow to $1 million in 37 years. It’s possible that the S&P 500’s total returns will be lower going forward than they have been in the past. However, the underlying reasons this approach has been successful historically should remain true in the future.

The S&P 500 regularly replaces underperformers with rising stars. Its diversification across 500 large-cap companies prevents a few bad eggs from causing massive losses. The Vanguard S&P 500 ETF’s annual expense ratio is only 0.03%, so fees don’t eat into returns much. And investing regularly each month allows investors to both ride the momentum of bull markets and buy shares at a discount during downturns.

But what if you don’t have 37 years to invest? As the old saying goes, “Better late than never.” You might be reassured to know that roughly 99% of Buffett’s wealth came after he was 65.