Warren Buffett loves giving out investment advice.
But let’s be honest: Buffett gives pretty much the same investment advice over and over again. Last year’s letter to shareholders? Investors should hit up low-cost index funds. What should his family invest in after he passes? Low-cost index funds.
And today, during a CNBC interview, Warren Buffett had a tried-and-true tip for Cleveland Cavaliers star LeBron James: Invest in low-cost index funds.
Is the man simply out of ideas? Nah. He just knows a good thing when he sees it. Low-cost index funds keep individual investors “in the game,” so to speak, allowing us to make big, broad, diversified investments while taking away that itch to make single-stock decisions that we’ll ultimately mistime.
But what index funds should King James invest in?
From one Cleveland-area guy to another, here’s a look at some of the best low-cost index funds on the market.
Best Low-Cost Index Funds: Vanguard S&P 500 ETF (VOO)
Expense Ratio: 0.05%
It’s probably best to start with the fund that the Oracle of Omaha has touted. Last year, when he discussed how his estate’s cash should be invested, Warren Buffett said:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)
Of course, he was talking about the exchange-traded version of the Vanguard 500 Index Fund (NYSEARCA:VOO).
The reasoning here is simple. You can get exposure to this quintessential American benchmark — some 500 stocks including Apple Inc. (NASDAQ:AAPL), Exxon Mobil Corporation (NYSE:XOM) and, hey, even Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) — by paying almost nothing.
Not that LeBron really needs to worry about fees.
Still, for just 0.05%, or $5 annually for every $10,000 invested, investors can tap the benchmark that a majority of hedge funds and fund managers fail to beat year in, year out.
Best Low-Cost Index Funds: Fidelity MSCI Health Care Index ETF (FHLC)
Expense Ratio: 0.12%
Healthcare is easily one of the biggest megatrends in investing. Here in the U.S., aging baby boomers are providing a booster shot to healthcare stocks of all shapes and sizes — such as the pharmaceutical companies providing the drugs that’ll keep boomers alive longer.
And while James can rely on medical staffers in Quicken Loans Arena, baby boomers (and all of us, really) still need our local hospitals, as well as senior housing developments later in life.
The Fidelity MSCI Health Care Index ETF (NYSEARCA:FHLC) is the cheapest way to get in on this trend. The fund provides exposure to many parts of the healthcare spectrum through holdings like pharma and healthcare consumer products giant Johnson & Johnson (NYSE:JNJ), insurer UnitedHealth Group Inc. (NYSE:UNH) and hospital firm HCA Holdings Inc (NYSE:HCA).
In fact, at 0.12% in expenses, the FHLC isn’t just the cheapest healthcare fund — it’s one of the lowest-cost index funds for any sort of sector-specific play.
Best Low-Cost Index Funds: Schwab U.S. Dividend Equity ETF (SCHD)
Expense Ratio: 0.07%
Every portfolio should include various income flavors, such as U.S. dividend stocks. And among low-cost index funds, Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is among the better straightforward options.
One “issue” that you’ll see with several U.S. dividend funds is that they focus on dividends as a means of finding high-quality holdings — not actual yield. Take the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), which yields just 1.9%.
Not that high-quality holdings are a bad thing, but if you’re actually targeting regular income, SCHD is a much more appropriate fund.
SCHD holds high-yield stocks such as Pfizer Inc. (NYSE:PFE) and Verizon Communications Inc. (NYSE:VZ), helping drive a 30-day yield of 3%, and a slightly worse (but still decent) 12-month trailing yield of 2.7%.
Best Low-Cost Index Funds: Vanguard Total Bond Market ETF (BND)
Expense Ratio: 0.08%
Bond investing bores most people to tears, but they’re an important part of a well-diversified portfolio, providing fixed and typically reliable income. However, given how much time James has before retirement (well, retirement age), he won’t need to load up too heavily for now.
Still, if LeBron wants to pinch pennies, Vanguard Total Bond Market ETF (NYSEARCA:BND) is one of the cheapest, most straightforward index funds that tackle the investment-grade bond market. Currently, 64% of the fund is invested in U.S. government debt, with the rest in various high grades of corporate debt. That translates into a modest 30-day SEC yield of 2%.
As always, be aware that if currently low interest rates start to rise, funds like BND could take it on the chin. But even if that happens, remember: Individual investors should buy and hold funds like these for a very long time (decades) and let compounding interest do its thing, which gives you plenty of time to wait for a recovery in bond prices down the road.
What investors should really like about BND is that it provides a cheaper avenue than its Investor Class mutual fund shares (MUTF:VBMFX) — BND charges 0.08% vs. VBMFX’s 0.2%.
Best Low-Cost Index Funds: iShares Global REIT ETF (REET)
Expense Ratio: 0.14%
When LeBron left Miami behind, his home of a couple years had to go, and he listed his Miami estate for $17 million.
Most of us won’t be flipping homes like that anytime soon. Investing in physical real estate can be an expensive, cumbersome process that most individual investors simply don’t have the capital to back or the knowledge to pull off properly.
Thankfully, investors have real estate investment trusts — or REITs. REITs are organizations with special tax privileges that own properties and make most of their money off rents. In exchange for those special tax privileges, they must throw off 90% of their income in the form of dividends, making them an investor favorite.
The iShares Global REIT ETF (NYSEARCA:REET) is a cheap way to invest in both U.S. and international real estate via REITs. Roughly 63% of the fund’s holdings are in U.S. REITs such as Simon Property Group Inc (NYSE:SPG) and Public Storage (NYSE:PSA), with the rest in internationals such as France’s Unibail-Rodamco (OTCMKTS:UNRDY).
The result is a nice 30-day SEC yield of 3.07% and some international exposure while still betting heavily on the U.S. — something Warren Buffett also is known to espouse.
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