What ETF Does Warren Buffett Recommend

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

There is no need to introduce Warren Buffett. He’s one of the most well-known money managers in the world and was previously among the world’s wealthiest individuals until he started donating a large portion of his fortune. According to BBC, in 2021, he donated $4.1 billion worth of stock in his firm, Berkshire Hathaway.

Warren Buffett, sometimes known as “The Oracle of Omaha,” consistently beats the market by investing in underappreciated firms with outstanding profitability indicators.

Don’t you wish you had money to put into a portfolio he put together?

You certainly can! In his letter to Berkshire Hathaway shareholders in 2013, Buffett detailed a specific portfolio approach including exchange-traded funds (ETFs). The Buffett ETF Portfolio, or the Warren Buffett Portfolio, as it became commonly known, shot to fame almost immediately after its inception.

The Warren Buffett ETF Portfolio: What Is It?

In 2013, Buffett wrote a letter to Berkshire Hathaway shareholders defining a basic portfolio that would go on to become a household term. The portfolio was an easy-to-understand guide for how he wanted his wife’s money to be invested after he passed away.

It’s only natural that investors would think, “If it’s a good method for Buffett’s wife to invest, it should work well for me too.”

What, then, is the portfolio? It’s about as lazy as it gets when it comes to investing, yet it produces very steady profits nonetheless. The portfolio is made up of two inexpensive index funds, one holding a wide variety of equities and the other a fascinating variety of bonds. That’s right: in the case that Buffet dies first, his wife will benefit from two assets in different asset classes.

Asset Allocation in a Portfolio

The portfolio’s asset allocation is rather straightforward. Ultimately, you’ll just have to put money into two different things. The distribution is as follows:

  • 90% in Large-Cap Stocks. Buffett stated in his letter to shareholders that 90 percent of his wife’s assets will be invested in large-cap domestic stocks.
  • 10% in Government Short-Term Bonds. Buffett recommended that his wife put the remaining 10% of her money in short-term government bonds, which are practically comparable to cash.

What About Asset Allocation and Diversification?

If you’re a novice investor who has done your homework, you know how crucial it is to spread your money around in a variety of different investments. What about Buffett’s investments, though? Does that rule out any of it?

There appears to be some logic to the portfolio’s allocation method, albeit it’s difficult to tell what the investing tycoon had in mind when he created the portfolio.

There is no discussion of or push for small or mid-cap equities or overseas investments, but an index fund that follows the S&P 500’s large-cap stock market index is recommended. Therefore, the portfolio’s stock holdings are spread out to some extent.

However, it’s not easy to figure out why Buffett wants his wife to put 90% of her money into stocks and shares. That’s an extremely dangerous move for any investor, let alone one nearing retirement age.

Furthermore, the portfolio’s bond holdings are composed entirely of short-term government bonds. With such low yields on bonds, that’s another intriguing play. Most investors see these holdings only as a place to store cash.

The jury is still out on the rationale behind the portfolio’s cash allocation, given that cash provides little protection against inflation or adverse market circumstances.

According to research, the risks are minimal.

At first sight, the portfolio may look like a very dangerous investment. The majority of financial experts agree that you shouldn’t invest more than 10% of your whole portfolio in equities at any given time.

Yet one study has found that the dangers aren’t as severe as first assumed. Professor of finance at Spain’s IESE Business School Javier Estrada analyzed data from 86 distinct 30-year intervals between 1900 and 2014.

He determined that the portfolio had a failure rate of just 2.3% based on the normal 4% withdrawal rate in retirement, which is extremely close to the rate of failure associated with the conventional 60/40 portfolio.

The Portfolio’s Investment Hypothesis

Intriguingly, the investing strategy is consistent with the guidance Buffett has offered for decades. If you’ve been following Buffett’s advice, you know that he has always recommended that people put their money into low-cost index funds that track major market indices like the S&P 500.

His whole life’s work is an example of the portfolio’s central argument. This portfolio follows part of Buffett’s investment prescription, which emphasizes high market capitalization firms.

The lengthy histories and steady expansion of large domestic enterprises inspire confidence. Your portfolio will benefit from the addition of a diverse and generally safe collection of equities if you decide to invest in them.

Again, it’s unclear why Buffett believes that a tenth of the portfolio should be allocated to short-term government bonds rather than any other fixed-income or safe-haven assets, but he is the Oracle of Omaha, and he is recognized for seeing what others don’t.

Who Should Invest in Warren Buffett ETFs?

Buffet has stated that this portfolio and its underlying investing philosophy isn’t appropriate for everyone. However, many investors might gain from using this approach.

Young Speculators

Those under the age of 35 are the ideal target audience for a portfolio of this type. These traders have time on their side and the financial resources to bounce back from a slump should one occur in their portfolios.

However, people who are in the middle of their investing careers and those who are getting ready to retire should exercise caution. For investors who will soon or currently rely on their assets to cover their living needs, even the risks associated with a 60/40 portfolio may be too much to bear.

Investors Who Are Educated

Keep your portfolio basic when you’re just starting out until you’ve done enough reading to fully grasp the intricate mechanism that drives Wall Street.

This portfolio offers diverse holdings in large, dependable firms, giving you the potential for high returns with minimum input from you. Thus, you may start investing right away and put your money to work right away, and you can always make changes as you gain experience and knowledge.

Maintain a Balanced Portfolio

Maintaining a diversified and even-weighted portfolio is a must for each investor. Each part of a well-considered strategy serves a specific purpose, some exposing your portfolio to profits and others shielding it from danger.

The value of the assets in your portfolio will fluctuate over time, and some will do so more quickly than others. Before the risk rises or your return potential is reduced, you should rebalance your portfolio to address this mismatch.

Because of its very high allocation to a single asset class, balancing this portfolio will be a one-of-a-kind experience. You won’t have to rebalance your portfolio too often because of this plus the fact that it’s a “lazy” buy-and-hold strategy. However, at least twice yearly, you should check to see if your portfolio is in a state of equilibrium.

Bottom Line

The Warren Buffett ETF Portfolio has several intriguing aspects, but that’s to be expected, given that Warren Buffett himself is a fascinating figure. Even if Buffett recommends this portfolio, it doesn’t mean it’s right for you.

The drawdown risks associated with this technique are just too great for investors who are not independently wealthy to take the chance on.

If you decide to go with this tactic, be imaginative in your approach. You may want to rebalance your portfolio such that it consists of less than 10% in government bonds and more than 90% in stocks based on your risk tolerance and other investment objectives.

You may quickly personalize the portfolio by researching the best ETFs that align with your investment plan.

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