When investors as famous as Warren Buffett, Ray Dalio, and Cathie Wood regard exchange-traded funds (ETFs) as important components of their investment strategies, it’s worth exploring why. These versatile investment vehicles offer a range of benefits, from low costs and diversification to thematic exposure and global reach, making them appealing to various investment philosophies.
This article delves into how these renowned investors incorporate ETFs into their portfolios and what we can learn from their approaches.
Warren Buffett
Warren Buffett, the chairman of Berkshire Hathaway, is known for his business-picking prowess but also advocates for low-cost index funds. Through Berkshire Hathaway, Buffett invests in the SPDR S&P 500 ETF Trust (SGX:S27), which mirrors the S&P 500 index, including 500 of the largest publicly traded US firms.
As of June 24, 2024, this ETF has a low expense ratio of 0.0945% and holds assets under management (AUM) of USD $528.7 billion. It had a 12-month total return of 21.45% based on net asset value (NAV) as of September 30, 2023, closely matching the index return of 21.62%. Its 5-year and 10-year average annual total returns based on NAV are 14.89% and 12.82%, respectively.
Buffett’s endorsement of the SPDR S&P 500 ETF Trust is rooted in his belief in the long-term performance of a diversified basket of stocks. He famously advised in a 2013 letter to Berkshire Hathaway shareholders that his trustee should invest 90% of his wife’s inheritance in a low-cost S&P index fund, emphasizing that passive investing through such ETFs is a smart strategy for most investors.
Ray Dalio
Ray Dalio, founder of Bridgewater Associates, also invests in ETFs, including the SPDR S&P 500 ETF, iShares Core S&P 500 ETF, and iShares Core MSCI Emerging Markets ETF. Dalio advises investors to diversify globally, reducing exposure to the US dollar and economy to benefit from international growth opportunities and emerging markets, which can offer higher returns due to faster economic growth.
SGX offers the Amundi MSCI Emerging Markets UCITS ETF – USD (SGX: H1N), designed to replicate the performance of the MSCI Emerging Markets Index. Despite a 3-year return of -15.18% as of first quarter 2024 (1Q 2024), it provided a 9% 1-year return and a 4.41% return in 1Q 2024. The ETF has an expense ratio of 0.55% and a global AUM of S$4 million.
Cathie Wood
Cathie Wood, founder and CEO of ARK Invest, focuses on thematic ETFs centered around disruptive innovation. ARK’s actively managed ETFs, such as the ARK Innovation ETF and ARK Genomic Revolution ETF, target sectors like artificial intelligence and biotechnology. Wood’s strategy involves selecting companies that are at the forefront of technological advancements, which can lead to high volatility but also significant growth potential.
CSOP iEdge Southeast Asia+ TECH Index ETF (SGX: SQU) (SGX:SQQ) is an alternative in an Asian context, with the fund focusing on tech companies in the Southeast Asia and India. This ETF aims to replicate the performance of the iEdge Southeast Asia+ TECH Index, a basket comprising the 30 largest technology companies based in India, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. As ARK’s ETFs are mostly on negative returns year-to-date (YTD), the CSOP iEdge Southeast Asia+ TECH Index ETF has also not fared well with -1.89% return YTD.
ETFs can complement various investment strategies whether you’re a value investor like Buffett, a global diversifier like Dalio, or someone seeking thematic exposure like Wood. Understanding the diverse ways in which top investors utilize ETFs can provide valuable insights for building a robust investment portfolio.
Disclaimer: ProsperUs Manager of Content Hailey Chung doesn’t own shares of any mentioned ETFs.
References
S27: SPDR® S&P 500® ETF Trust | SSGA
Innovation ETFs by ARK Invest | Innovation is Key to Growth (ark-funds.com)
PowerPoint Presentation (sgx.com)
