When Warren Buffett, arguably the greatest investor of our time, offers investment advice, the financial world listens carefully. Despite his extraordinary success in picking individual stocks, Buffett has consistently recommended that most investors focus on low-cost exchange-traded funds (ETFs) as their main investment vehicle for building wealth.

Buffett's Simple Advice

Buffett's advice for most investors, especially those who don't have time to actively follow the markets, is straightforward: invest in a low-cost S&P 500 index fund, typically available as an ETF. In fact, Buffett has famously said that upon his passing, 90% of his estate intended for his wife would be invested in a low-cost S&P 500 ETF, while the remaining 10% would be in government bonds.

Why Does Buffett Favor ETFs?

1. Low Fees: One of Buffett's main reasons for recommending low-cost ETFs is the minimal fees associated with them. Active funds, managed by professionals attempting to beat the market, often charge fees between 1% and 2% per year. Over decades, these fees can significantly erode returns. In contrast, ETFs that track broad indexes like the S&P 500 often have fees as low as 0.03% to 0.10% per year, preserving more of your investment gains.

2. Simplicity and Reliability: Investing in an ETF that tracks the market requires minimal effort and expertise. This simplicity makes it an ideal choice for investors who don't have the time or inclination to research individual stocks. Buffett emphasizes that by owning an S&P 500 ETF, you are essentially betting on America's economic growth over the long term—a bet that has consistently paid off throughout history.

3. Proven Track Record: Historically, very few active fund managers have been able to consistently outperform the market. Research shows that about 80-90% of active funds underperform their benchmark indexes over 10-year periods. Buffett believes that most investors would be far better off earning consistent market returns than trying to beat the market, which often leads to underperformance.

The Power of Compounding

Buffett often stresses the magic of compound interest. By investing in low-cost ETFs and reinvesting dividends, investors can harness this powerful force. For example, the S&P 500 has historically averaged an annual return of around 10% (before inflation) over the long term. If an investor consistently invests in a low-cost ETF, the compounding effect over 20, 30, or even 40 years can be remarkable, turning relatively small contributions into substantial sums.

Choosing the Right ETF

When selecting an ETF, Buffett’s criteria are straightforward:

• Broad Market Exposure: An ETF that tracks a large, diverse index like the S&P 500 or total stock market.

• Low Expense Ratio: The lower the cost, the more money stays invested.

• Proven Provider: Reliable fund companies like Vanguard, BlackRock (iShares), or State Street (SPDR) are typically recommended.

Final Thoughts

Buffett’s advice to invest in low-cost ETFs is rooted in decades of experience and a deep understanding of how markets work. For most people, following Buffett’s approach to passive investing is not just simple—it’s one of the smartest, safest, and most reliable ways to build long-term wealth.