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Warren Buffett, the CEO and chairman of Berkshire Hathaway, famously placed a bet in 2007, wagering $1 million that an S&P 500 index fund would outperform a selection of hedge fund managers over a decade. By 2017, Buffett’s prediction proved correct.
Today, many individual investors are emulating Buffett’s approach, investing their capital in the S&P 500 through exchange-traded funds (ETFs) or mutual funds.
The S&P 500 index comprises 500 of the largest publicly traded U.S. companies and is weighted according to market capitalization, meaning that a company’s valuation influences its representation in the index. The index undergoes quarterly rebalancing to maintain accurate positions.
Further Insights on ETFs
For investors interested in ETFs, several notable stories provide additional insights.
The three leading ETFs that track the S&P 500 are the SPDR S&P 500 ETF Trust (ticker: SPY), the iShares Core S&P 500 ETF (ticker: IVV), and the Vanguard S&P 500 ETF (ticker: VOO). Together, these funds account for nearly 17% of the entire U.S. ETF market, according to data from Morningstar.
In 2024, the Vanguard S&P 500 ETF has emerged as the top choice among these, boasting $71 billion in net inflows during the first nine months, surpassing the previous year’s record set by SPY by $20 billion.
Predicting Future Index Performance
The S&P 500 index has attracted attention for reaching new all-time highs in 2024, reportedly gaining about 20% year to date as of October 8, and a total increase of 33% over the past year. This growth has exceeded some analysts’ expectations, fueled by a more robust U.S. economy than initially projected.
Larry Adam, chief investment officer at Raymond James, noted, “The recession everyone was anticipating didn’t occur.” The firm now foresees a soft landing for the U.S. economy, yet the potential for stock market gains may be more tempered moving forward.
Adam suggests that future performance will likely be “upward, but more muted,” reflecting historical trends where markets generally decline by approximately 1.5% from October to Election Day due to uncertainty.
Despite short-term fluctuations, Adam remains optimistic, indicating that the market typically recuperates those losses and continues to rise. In a recent forecast, Goldman Sachs upgraded its prediction for the S&P 500 index for 2024 to 6,000, up from 5,600, reflecting anticipated earnings growth. Similarly, Tom Lee, managing partner at Fundstrat Global Advisors, shared a target of 6,000 for the S&P 500 by the end of the year.
Long-Term Viability of the S&P 500
Investing in the S&P 500 index is a favored strategy for many. Bryan Armour, director of passive strategies research at Morningstar, emphasizes that the success of this method is rooted in several factors that are unlikely to change. These include its cost-effectiveness, ability to capture a wide range of investment opportunities, and a track record of long-term outperformance.
Armour further explains that the S&P 500 is generally more diversified than most investment strategies, allowing a passive investment approach that can shield investors from the pitfalls of market timing.
However, relying solely on an S&P 500 index fund does impose risks, particularly concentration risk. Sean Williams, a certified financial planner at Cadence Wealth Partners, cautions against putting all investments into a single asset class, despite the S&P 500’s strong performance over the past decade. He advocates for a broader investment strategy that includes international markets, small- and mid-cap stocks, and real estate.
Currently, information technology represents a significant element of the S&P 500, accounting for approximately 31.7% of the index, featuring major players like Apple, Microsoft, Nvidia, and Broadcom.
To address concentration risks, Armour recommends considering a total stock market portfolio, such as the Vanguard Total Stock Market ETF (ticker: VTI), which provides more balanced exposure across different market segments. Investors may also explore options like small value ETFs, which Morningstar analysts currently identify as being undervalued.
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