Warren Buffett's Investment in a Vanguard ETF: Potential Risks Ahead

Warren Buffett has built a massive fortune by investing in individual companies. At times, he has led Berkshire Hathaway to purchase entire businesses. Other times, he has invested in stocks, acquiring shares of different companies.

Recently, however, Buffett's approach has shifted a bit. In 2019, he began adding exchange-traded funds (ETFs) to Berkshire's investment strategy, which has proven to be a wise move, given the gains these ETFs have generated.

Yet, the outlook may not be as bright as before. Buffett currently holds one Vanguard ETF that a leading Wall Street analyst believes could soon see a significant decline.

Buffett's Preferred ETF

While Buffett has not completely shifted to ETFs, as the majority of Berkshire's more than $300 billion equity portfolio is still primarily in individual stocks, he does have a couple of ETFs in his investment collection.

The two ETFs that Buffett focuses on are quite similar in nature. Both the SPDR S&P 500 ETF Trust (commonly known as SPY) and the Vanguard S&P 500 ETF (known as VOO) aim to track the performance of the S&P 500 index.

Though they are almost identical in their holdings, there are differences. The SPDR ETF is larger in size, while the Vanguard ETF has a lower expense ratio, making it more cost-effective.

Buffett seems to favor the Vanguard ETF slightly, as evidenced by the fact that Berkshire Hathaway owns more of VOO than SPY. Additionally, he expressed a preference for Vanguard S&P 500 funds in his 2013 letter to Berkshire Hathaway shareholders.

Concerns About the Market

Buffett first invested in the Vanguard S&P 500 ETF in the fourth quarter of 2019, and since then, it has returned over 100%. This impressive performance must please the renowned investor. However, he may need to prepare for potential losses as market forecasts change.

In a recent discussion, Barry Bannister, Chief Equity Strategist at Stifel, stated in an interview that the S&P 500 could drop by 26% in the upcoming year. He described the current stock market as 'effervescent,' suggesting it is somewhat inflated. His concerns revolve around the high valuations and the overall economic environment.

Stifel is not alone in its pessimism. Just recently, Seth Carpenter, Chief Global Economist at Morgan Stanley, expressed worries regarding potential economic impacts from proposed tariffs by President-elect Trump, which could lead to higher inflation and slower economic growth in the U.S. and its trading partners.

Although Carpenter did not specifically predict a significant decline in the S&P 500 like Bannister did, he implied the S&P 500 typically mirrors the U.S. economy, which often reacts to economic changes before they manifest in hard data.

Is the Vanguard ETF at Risk?

If Bannister's forecast comes to pass, both the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust could experience serious declines in 2025. Whether his prediction will hold true is uncertain.

It is conceivable that promises of deregulation and corporate tax cuts in a second Trump administration could keep the stock market buoyed for a while longer. Yet, there are also valid fears concerning the impact of tariffs, particularly if Trump follows through with his intention to impose steep charges on imports.

Fortunately for long-term investors, market fluctuations, along with political policies, will come and go. Historically, the S&P 500 has delivered strong returns over the long term, and it is likely that Buffett's preferred Vanguard ETF will continue this trend.

Investing carries risks, and it is important to stay informed about market trends and potential outcomes.

investment, ETF, Buffett