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Buffett Recommends Index Funds. What's The Best One?

|About: iShares Core S&P 500 ETF (IVV), SPY, VOO
Summary

For most people, Warren Buffett recommends index funds. But which is the best?

Review the prospectus to understand the investment objective, strategy, fees, tracking error, and more.

VOO stands out from the crowd of S&P 500 Index funds.

Throughout the years, many people have asked Warren Buffett for investment advice. Each time, he tells them to consider index funds. Now for the average person, this is a good idea because their portfolio will at least perform on par with the general market. Further, index funds charge low expense ratios, so it doesn't cut too much into investor's earnings. But with the plethora of index funds out there, the question now becomes: which index fund should I pick?

Now before choosing the right index fund for you, you should first consider about your investment objective and capacity. For instance, what are you hoping to achieve with your investment? How much can you invest? For how long? What would you do if the market tanks: Sell it all? Sell some? Do Nothing? Buy more? What would you do if the market soars? How liquid do you need your investments be and more?

After answering those question, the next thing is the "funnel exercise" where you list out all the index funds available. Some people might say you should find funds tracked to the S&P 500, others might say the Russell 1000 or Wilshire 5000. Whatever index you want to track, I'd get a list. Once you gather that list, the next step is to analyze the choices.

I personally like funds tracking the S&P 500 because I feel the S&P 500 is fairly well designed and a fair indicator of the general market. Three ETFs stood out: Vanguard 500 Index Fund ETF Shares (VOO), BlackRock iShares Core S&P 500 ETF (IVV) and State Street's SPDR® S&P 500® ETF (SPY).

Among those three, I like VOO the best because of its combination of low expense ratio, low tracking error, and high efficiency.

Disclosure: I am/we are long VOO.