Why I Disagree With Warren Buffett
Nine of the Lowest Fee ETFs
REITS, Dividends, Growth and Value ETFs
Earlier this month, Warren Buffett made headlines when he said that most investors should forego trying to pick stocks and time the market, and just invest in low-cost index funds instead. In his annual letter to shareholders, he wrote about how he and vice chairman Charlie Munger analyze stocks for Berkshire Hathaway, but then cautioned investors against trying it themselves. “The goal of the non-professional should not be to pick winners,” he wrote, “but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
He backed up his words by sharing that his will instructs his trustees to do just that with his wife’s inheritance, putting 10% of the cash in short-term government bonds and 90% in a “very low-cost” S&P 500 index fund. He concludes, “I believe the trust's long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.”
It probably won’t surprise you that I disagree with Buffett about the futility of picking winners. Our experience here at Cabot has shown that, contrary to Buffett’s claims, most investors can learn to pick—and hold—winners in the stock market. Just look at our performance record on cabot.net.
However, while I don’t agree with Buffett about how individual investors should be investing, I do think that for investors who don’t want to try to pick winning stocks, his endorsement of low-fee index funds is spot on.
If you don’t want to or don’t have time to buy individual stocks yourself, there are hundreds of ETFs that track every conceivable type of index for fees of less than 1% per year. The largest S&P 500 tracking funds have expense ratios of less than a tenth of a percent.
But you don’t just have to track the overall market—there are low-fee ETFs that cater to every kind of investor, from aggressive growth investors to risk-averse income investors to investors who want to bet on a specific sector or area of the world. Here are nine interesting very-low-cost ETFs, all with expense ratios of a tenth of a percent or less.
Real Estate Investment Trusts, or REITs, have some of the highest yields of any investment. But owning individual REITs can complicate your taxes, and they can be hard to analyze because of their high levels of debt and unusual accounting practices (unfamiliar investors frequently email me to ask how a REIT’s distributions can be greater than its EPS, for example).
With an expense ratio of just 0.07%, the Schwab US REIT ETF (SCHH) is the cheapest way to add diversified REIT exposure to your portfolio. SCHH tracks the Dow Jones U.S. Select REIT Index, which includes 87 REITs in a variety of niches, from shopping centers to self-storage businesses to retirement communities. The downside is a yield of only 2.4%, which is very low for the REIT sector. If you’re willing to pay a bit more for a higher yield, the Vanguard REIT ETF, VNQ, has an expense ratio of 0.10% and yields 4%.
If you want the regular income and dividend growth potential of dividend-paying stocks, but aren’t a stock picker, you might consider the Vanguard Dividend Appreciation ETF (VIG), which has a low expense ratio of 0.10%. VIG is based on an index that tracks “a select group of securities with at least 10 consecutive years of increasing annual regular dividend payments.” The yield is a low 1.9%, but the index’s focus on stocks committed to increasing dividends means that your yield is likely to go up over the course of time. If you’d bought the fund five years ago, for example, your yield on cost would now be 4.7%. It’s also low-volatility, with a beta of less than one.
Even cheaper is the Schwab US Dividend Equity ETF (SCHD), launched in 2011. It tracks an index of U.S. stocks with high yields and a consistent dividend history that are “selected for fundamental strength relative to their peers, based on financial ratios.” Performance-wise, the fund’s limited history is about in line with VIG’s, and both track the broad markets closely over the long term.
Hands-off growth investors should check out the Vanguard Mid-Cap Growth ETF (VOT) or Schwab U.S. Midcap ETF (SCHM) which juice the performance of the indexes in good times by focusing on faster-growing mid-cap stocks. Here’s a five-year chart of VOT vs. the S&P 500.
Of course, the converse is that these smaller, faster stocks are more vulnerable during corrections and bear markets.
VOT’s expense ratio is a reasonable 0.10% and the Schwab offering is even cheaper, at 0.07%.
Lastly, if you’re a bargain hunter who just wants to buy and hold a broad swath of fundamentally undervalued companies, there are several very low-cost options for you.
Another Schwab offering, the Schwab U.S. Large-Cap Value ETF (SCHV) is the cheapest option, with an expense ratio of 0.07%.
Vanguard also has two inexpensive options, the Vanguard Value ETF (VTV) and the Vanguard Mid Cap Value ETF (VOE), both with expense ratios of 0.10%. While VTV doesn’t specify a capitalization focus in the name, its market cap breakdown is nearly identical to SCHV’s, as you can see below.
Performance-wise, all three ETFs track the major indexes pretty closely, although VOE outperforms during bull markets.
There are hundreds more ETFs with expense ratios under 1%, many of which have outperformed more expensive investment strategies consistently. ETFdb.com is a useful website for screening ETFs by expense ratio, performance, strategy and practically any other characteristic you can think of. Investors who want to follow Buffett’s advice should have no trouble finding something that fits their strategy perfectly.
Before I go, I’d like to remind you that the best rate for our annual Cabot Investors Conference August 13-15 is only available for a few more days. We already have some wonderful, loyal subscribers signed up, and I’m sure they’d love to meet you, as would I. Plus, the two days of investing workshops and one-on-one interaction with all our analysts is simply the best opportunity you’ll have all year to bring your investing game to the next level. Just click here now for details. I hope to see you there!
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor
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