Why Warren Buffett loves ETFs

With a net worth exceeding US$140 billion(1) and a famously successful investing track record, we listen when the Oracle of Omaha speaks. Despite being a uniquely talented stock picker, Warren Buffett’s advice to the majority of investors is simple: choose low-cost ETFs or index funds, and let time work its magic.

In this blog, we’ll explore why Buffett is such a fan of ETFs and what that means for investors.

What does Buffett say about ETFs?

For novice and seasoned investors alike, Buffett has long been a champion of ETFs. In Berkshire Hathaway’s 2013 Shareholder Letter(2), he wrote:

“The goal of the non-professional should not be to pick winners – neither he nor his ‘helpers’ can do that – 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.”

At its core, Buffett’s argument is that most investors, despite their best efforts, are unlikely to consistently outperform the market after accounting for fees and mistakes. Even professional fund managers often struggle to beat their benchmarks over the long term.

This view is supported by the SPIVA Australia Scorecard, a report regularly published by S&P Global(3). The report tracks the performance of active funds relative to their benchmarks over various timeframes . As shown in the graph below, the majority of active managers across asset classes underperform their benchmarks over the long term, with exceptions seen in mid- and small-cap managers and bond funds, depending on the period analysed.

Percentage of underperforming active funds in Australia

In other words, keep things simple, straightforward and inexpensive.

ETFs and Buffett’s investment philosophy

Buffett’s investment philosophy can be summarised in three key principles: diversification, fee minimisation and long-term compounding. Given these values, it’s clear why ETFs are a fit for this approach.

ETFs provide instant diversification

Buffett champions a well-diversified portfolio, and many ETFs offer diversification in a single product. As he said in his 2013 Shareholder Letter:

“The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.” (4)

Instead of researching individual companies or getting caught up in hype cycles, ETFs allow investors to tap into an entire portfolio of shares or other asset classes in a single trade. This approach helps minimise the volatility and risk inherent in holding a handful of stocks, no matter how well-researched they are.

Lower fees mean greater profits

Buffett has famously railed against the high fees typically associated with active management.

When costs eat into your returns year after year, it becomes increasingly difficult to stay ahead of the market’s natural performance. The beauty of ETFs, especially those that track broad indices, is they usually come with significantly lower fees compared to actively managed funds. The benefit of consistently lower fees increases over long investment horizons – which aligns perfectly with Buffett’s own stated principle from his 1988 Shareholder Letter(5): “when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”

The magic of long-term compounding

Buffett’s investing style has always relied on compounding over time. Sustainably building wealth isn’t about quick gains, but about letting exponential growth do the heavy lifting over decades.

Many ETFs are well-suited to this patient, long-game approach. By buying into a low-cost, diversified ETF and reinvesting distributions, investors can harness the power of compounding returns and steadily grow their portfolios in tandem with the market despite periodic downturns.

Applying Buffett’s principles to Australian investors

As an American, much of Buffett’s advice centres on US markets. But the principles he promotes are easily transferred to Australian conditions: the ASX features a vibrant ETF ecosystem that offers exposure to not only Australian equities but international shares, fixed income, commodities, and thematic strategies. When applying Buffett’s philosophy to your portfolio, consider the following funds that highlight value, quality and diversification – characteristics that resonate with Buffett’s time-tested investing approach.

ASX: BGBL Global Shares ETF

Featuring a range of approximately 1,500 developed market stocks, BGBL encapsulates Buffett’s view that owning a broad slice of the market offers a balanced way to gain from American and global economic growth over time.

• What it does: BGBL provides exposure to a broad basket of global ex-Australia shares in one trade.
• Sample holdings: Apple, Nvidia, Amazon, Tesla, Costco, Nestle, Toyota and Buffett’s Berkshire Hathaway itself.
• How it aligns with Buffett’s philosophy: This fund delivers instant diversification across multiple markets and sectors, much like the S&P 500 index fund Buffett praises. It taps into the long-term growth potential of global equity markets with a fee of just 0.08% annually. A hedged version of the fund, HGBL Global Shares Currency Hedged ETF , is also available for a fee of 0.11% p.a.

ETF

Betashares Global Shares ETF (BGBL)

Global Shares

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ASX: QLTY Global Quality Leaders ETF

QLTY represents a combination of quality screening and diversification, reflecting Buffett’s preference for investing in “wonderful companies at a fair price” with minimal speculation on short-term movements.

• What it does: QLTY invests in a portfolio of global companies identified for their quality characteristics: return on equity, debt-to-capital ratio, cash flow generation ability and earnings stability.
• Sample holdings: Arista Networks, Cisco Systems, Visa, Procter & Gamble and Johnson & Johnson.
• How it aligns with Buffett’s philosophy: Buffett’s investing success is often attributed to his focus on top-tier businesses with strong fundamentals, capable of compounding over many years. This ETF uses a rules-based approach to identify such businesses, which aligns closely with Buffett’s emphasis on investing in companies with strong balance sheets.

ETF

Betashares Global Quality Leaders ETF (QLTY)

Global Shares

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ASX: AQLT Australian Quality ETF

A rules-based quality screen applied to Australian equities makes it easier to invest systematically in local companies with robust fundamentals.

• What it does: AQLT provides exposure to a diversified portfolio of Australian companies screened for quality factors, similar to QLTY’s global approach but focused on the ASX.
• Sample holdings: Telstra, Wesfarmers, Westpac Banking Corp and Pro Medicus.
• How it aligns with Buffett’s philosophy: If you want to build your core Australian equity exposure, AQLT includes a diversified portfolio of companies with enduring business models and strong competitive positions, reflecting Buffett’s philosophy of focusing on high quality companies.

ETF

Betashares Australian Quality ETF (AQLT)

Australian Shares

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Building wealth with a Buffett-inspired portfolio

Warren Buffett’s advice to investors underscores some of the most powerful yet simple truths in investing: most of us are best served by keeping our investing activities low-cost and diversified for the long haul. ETFs are well-aligned with these principles, providing a straightforward, transparent and cost-effective vehicle for growing wealth in line with the sharemarket.

Markets fluctuate, and every investor’s situation is unique, but the low barrier to entry of ETFs –especially when using zero-brokerage platforms like Betashares Direct – makes them an ideal vehicle for incorporating a Buffett-like approach to just about any portfolio.

Written By Annabelle Dickson