Berkshire Hathaway (NYSE:BRK.B) shares advanced 3.4% over the past week, closing at $511.54 on Friday. In contrast, the top S&P 500 ETFs—Vanguard S&P 500 ETF (NYSEARCA:VOO), iShares Core S&P 500 ETF (NYSEARCA:IVV), and SPDR S&P 500 ETF Trust (NYSEARCA:SPY)—each gained about 1.1% during the same period. This outperformance, while notable, does not alter Warren Buffett's long-standing advice favoring low-cost index funds for most investors.
One key consideration for investors choosing among these ETFs is the difference in expense ratios. VOO and IVV charge a minimal 0.03% annually, while SPY's fee is 0.0945%. On a $2,000 investment, this translates to a yearly cost of $0.60 for VOO and IVV versus $1.89 for SPY—a difference of $1.29. Over three years, that gap compounds to roughly $3.90, but more importantly, it represents a 6.45 basis point spread that can impact long-term returns.
Beyond fees, the concentration of the S&P 500 in a few mega-cap stocks is a growing concern. As of July 30, Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), and Microsoft (NASDAQ:MSFT) together accounted for 20.27% of SPY's assets. Each of these three stocks holds a weight exceeding 5%. If all three moved 1% in tandem, SPY would shift by about 0.20 percentage point, assuming no other changes. This sensitivity is equivalent to 3.1 years' worth of the fee difference between SPY and VOO or IVV.
The three ETFs all track the same benchmark index, so the concentration risk is identical across them. Switching from SPY to VOO or IVV does not mitigate the impact of a downturn in mega-cap tech. To reduce exposure to these top-heavy weights, investors must consider diversifying beyond the S&P 500 itself.
Friday's trading data highlighted a stark liquidity difference: SPY saw 62.45 million shares change hands, roughly eight times VOO's volume (7.72 million) and nearly 13 times IVV's (4.90 million). This liquidity premium is one reason some investors may prefer SPY despite its higher fee, as it allows for easier entry and exit in large quantities.
Berkshire's weekly gain of 3.4% outpaced the ETFs by about 2.3 percentage points, but this single-week performance is not a reason to abandon index investing. In his 2013 letter to shareholders, Buffett recommended that a 90% allocation to a low-cost S&P 500 index fund (specifically Vanguard's) and 10% to short-term government bonds would be suitable for most investors.
Looking ahead, the market faces a pivotal week. A Reuters poll projects July payrolls to increase by 83,000, with unemployment ticking up to 4.3% on August 7. Additionally, over a quarter of S&P 500 companies are scheduled to report earnings, with adjusted quarterly profit running 29.3% higher than a year earlier. Yung-Yu Ma, chief investment strategist at PNC Financial Services Group (NYSE:PNC), noted that the market is "searching to regain its footing" and that earnings "should provide stability."
Risks remain: if payroll figures exceed expectations, speculation about rate hikes could intensify, and any downturn in mega-cap tech would hit all three ETFs simultaneously. Minimal fees do not shield investors from valuation declines. For those concerned about concentration, the solution lies in asset allocation beyond the S&P 500, not in switching between these identical index funds.
