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With an S&P 500 ETF, investors can benefit from the growth of the U.S. economy.
Warren Buffett has never shied away from offering investing tips and philosophies to the masses. It’s been part of his legacy for the last half-century or so. Among all the gems he’s passed along, one piece of advice always remains the same: Most people only need to invest in the S&P 500 over the long term to build wealth.
Berkshire Hathaway owns close to 50 stocks, but the one Buffett always steers investors toward is the Vanguard S&P 500 ETF (FLIGHT 0.53%). If you’re wondering why, look no further than the following graph.
Image source: Statista.
A bet on the U.S. economy
The S&P 500, which contains the largest 500 companies on the U.S. stock market, acts as a gauge of the economy. The index and the economy aren’t directly correlated, but there’s a lot of overlap between them because of how much the component businesses contribute to the gross domestic product (GDP) and the overall economy.
You can think about it like this: A growing U.S. economy means higher corporate profits, which turn into stock price growth as investors gravitate toward the higher profits and the chance for future gains. It can also work the opposite way: Higher corporate profits (ideally) help the economy by creating more jobs and increasing consumer spending, which leads to economic growth.
Admittedly, that’s a very simplified version of how it works, but the bigger point is how S&P 500 growth can be tied to U.S. economic growth.
It sounds simple, but it’s effective
Up to this point, investing in the S&P 500 and trusting the growth of the U.S. economy has been a strategy that has built wealth for millions. In the above graph, U.S. GDP increased by around 350% from 1990 to 2023, with a compound annual growth rate of around 4.68%. The S&P 500 has trended on the same upward path but with higher growth.
^SPX data by YCharts.
The Vanguard S&P 500 ETF was created in September 2010, so I used the S&P 500 index to show growth from 1990 to 2023. However, for perspective, the ETF has returned close to 400%, averaging over 12% annual returns.
“Just invest in the S&P 500” sounds simple enough, and that’s the problem. It sounds so simple that many people think it’s too simple. But that’s the beauty of it. You can’t predict how the market will perform, but you can put your trust in a simple investing strategy that has stood the test of time.
Stefon Walters has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.