1 Warren Buffett ETF To Buy?

One reason the “Oracle of Omaha” became a billionaire was because he took early stakes in some of the biggest brands in the world, including Apple and Coca-Cola.

But it wasn’t just his stock-picking prowess that earned the world-famous investor his accolades. Indeed one researcher recently claimed Buffett’s real skill was figuring out how to spot undervalued companies decades before other financial analysts caught up to the process.

The tenets of the Buffett investing philosophy have been well defined over the years, and the billionaire’s techniques have been highly scrutinized.

Buffett buys stocks of well-run companies with strong economic moats, when their stocks trade at a discount to fair value. A case in point is his significant 2016 Apple stock buy, which earned the investor, and his firm Berkshire Hathaway, an over 575% return to-date. But that’s solely the stock’s return, it doesn’t include another core component all Buffett stocks share: dividends.

Because most investors can’t pick stocks like Warren Buffett, and the Oracle himself has gone on record that most people shouldn’t even try, exchange-traded funds (ETFs) are a better solution. Investors can buy a share in hundreds of the world’s best companies in a single click, because ETFs follow the components of popular stock indexes like the S&P 500.

So if there were one ETF tailor-made for Buffett, which one makes the cut?

How Has VIG Performed?

Buffett might appreciate Vanguard’s Dividend Appreciation ETF (NYSEARCA: VIG), which tracks the S&P U.S. Dividend Growers Index. To be included in the index, a company must have 10 years of demonstrable increases in its dividend.

That means the fund includes such favorites as Microsoft and Apple, which comprise 4.02% and 3.68% of the fund’s portfolio, respectively. It also holds substantial stakes in Buffett-favored stocks Visa and Coca-Cola.

It doesn’t, however, have positions in Magnificent Seven stocks Amazon, Tesla, Nvidia, or Google, because those companies don’t pay dividends.

Another drawback is that AI players in VIG’s portfolio are limited to Microsoft and chipmaker Broadcom. Nevertheless, that may not deter investors who are more intrigued by the fund’s stability than its gains.

In that regard, VIG is up 11.6% over the past 12 months. Over the past 5 years, the ETF has returned 55% in addition to its dividend yield. The annual dividend yield is 1.77%, and the ETF paid out $3.08 per share in dividends in the past year. The last quarterly dividend payout, in March of 2024, was $0.77 per share.

Is VIG or VOO Better?

While VIG has performed far better than the majority of single stock investments, it’s not the only ETF in town worth considering.

One of the most popular ETFs is another Vanguard offering, the S&P 500 ETF (NYSEARCA: VOO). VOO tracks the components of the S&P 500, which includes the best and biggest U.S. companies in the world.

VOO has no dividend stipulation, so it includes all of the Magnificent Seven, among others. That’s one of the key differences between VOO and VIG. VOO has 505 stocks in its portfolio, and VIG only has 340.

VOO also has a much higher tech concentration, with Microsoft, Apple, and Nvidia each accounting for over 5% of the portfolio.

The tech success of the past year has helped VOO owners out. VOO is up 20.7% over the past year, almost twice what VIG returned. Over the past five years, VOO has outperformed VIG as well, returning 69.8%.

As expected, VOO has a lower annual dividend yield than VIG, at 1.36%. But what potential VIG investors might find shocking is that VOO actually paid out more in dividends last year. VOO paid an annual dividend of $6.17 per share, and the last quarterly payout amounted to $1.54 per share.

What Is The Expense Ratio For VIG ETF?

In addition to underperforming VOO on gains and dividends, VIG is a little more expensive to hold.

Both funds are passively managed, meaning that automated processes alter the components of each ETF based on the indexes they track. But there are still fees associated with ETF management, which are automatically deducted from an investor’s shares of the ETF.

The amount taken out is based on the fund’s expense ratio. VIG currently has an expense ratio of 0.06%, while VOO has an expense ratio of 0.03%.

While VIG is technically higher, it’s worth noting that both ETFs have small expense ratios, and most investors aren’t likely to notice the fees associated with either of them.

Is VIG Undervalued?

Both ETFs likely make the cut for Buffett, because they both pay solid dividends and are low-cost in terms of expense ratios.

Another key factor Warren Buffett eyes is stocks on sale. VIG currently has a price-to-earnings ratio of 24.2x. That’s lower than VOO, which has a P/E of 26.1x. The premium is not entirely surprising given that VOO includes more technology stocks, some of which have sky-high earnings multiples.

In terms of out of pocket expense, it’s also worthwhile to note that VIG is quite a bit cheaper. The ETF currently trades under $200 per share, which compares favorably to the ballpark $450 price tag to purchase a share of VOO. Another consideration for potential VIG owners is that VOO might have increased volatility due to its higher concentration of technology stocks.

Concerns have mounted that an artificial intelligence stock bubble has formed. If true, VOO is likely to suffer the brunt of a correction more so than VIG.

Is VIG ETF a Buy or Sell?

The Vanguard Dividend Appreciation fund is likely to fit the bill for Warren Buffett. It should also be a strong consideration for investors who are already highly concentrated in VOO, or other S&P 500 tracking ETFs, as a way to hedge against potential volatility in the tech market.

While picking single stocks might have worked for Warren Buffett, buying ETFs has a lot of merit, and VOO and VIG are both strong contenders.

With all that said, the purchase of such ETFs will only pay off in the end if investors remember one of the other central tenets of Buffett’s strategy, which is to hold on through thick and thin. When the going gets tough, continuing to invest is precisely what will lead to more success long-term.

In the immortal words of Warren Buffett: “Our favorite holding period is forever.”

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.