The legendary investor likes this ETF for good reasons.
Warren Buffett's net worth reached $1 million by the age of 32. Most people won't be able to achieve this impressive accomplishment at such an early age.
However, reaching that magical million-dollar milestone isn't impossible. Instead, it's a realistic goal for many Americans. How? This Buffett exchange-traded fund (ETF) could make you a millionaire the easy way.
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Buffett's top ETF
Buffett is a big fan of low-cost S&P 500 index funds. In his 2013 letter to Berkshire Hathaway shareholders, he recommended that most investors put their money in such a fund. Buffett's reasoning was straightforward: "In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts)."
An S&P 500 index fund provides a way to own shares of the 500 largest U.S. companies across multiple sectors. Buffett emphasized keeping costs low in investing. S&P 500 index ETFs allow you to do so.
So which S&P 500 index ETF does Buffett like the most? The Vanguard S&P 500 ETF (VOO 0.53%). It's been available to investors since 2010. The fund's expense ratio of 0.03% is exceptionally low -- just like Buffett prefers.
Berkshire Hathaway's portfolio includes only two ETFs. More of the conglomerate's money is invested in the Vanguard S&P 500 ETF. Buffett also mentioned in his 2013 shareholder letter that he recommended Vanguard's S&P 500 index fund to the trustee responsible for managing the investment of funds his family will one day inherit.
The simple path to $1 million
Only two steps are required to become a millionaire with the Vanguard S&P 500 ETF. First, invest in the ETF regularly. Second, wait. The more money you can invest, the less time required. The less money you can invest, the more time required.
The S&P 500 index adopted its current form with 500 companies in 1957. Since then, it has generated an average annual return of 10.26%. If we assume the Vanguard S&P 500 ETF will achieve a similar return in the future, it's easy to calculate how the fund can help you become a millionaire.
The following table shows what it would take at different investment amounts and periods (adjusting for the Vanguard ETF's small annual expense percentage):
| Amount Invested Per Year | Number of Years | Investment at End of Period |
|---|---|---|
| $2,000 | 40 | $1.03 million |
| $4,000 | 33 | $1.03 million |
| $6,000 | 29 | $1.02 million |
| $8,000 | 27 | $1.11 million |
| $10,000 | 24 | $1.01 million |
Most people work for around 40 years during their career. Investing $2,000 per year (less than $167 per month) in the Vanguard S&P 500 ETF could realistically enable a person to become a millionaire.
Two potential problems
Is it really that easy? Yep. However, there are two potential problems.
The obvious one is that the S&P 500 might not deliver returns in the future as it has in the past. Even if this is the case, it's still possible to become a millionaire by investing in the Vanguard S&P 500 ETF. You'd have to increase the amount invested, the number of years invested, or both.
The less obvious issue is inflation. A million dollars decades from now won't have the same buying power as it does today. Because of this inflationary impact, you'll probably want to aim higher to feel like a millionaire. But Buffett's top ETF should still be a great vehicle to help get you there.
Keith Speights has positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
