How Buffett Used The S&P 500 To Donate $2m To Charity
The S&P 500 is an index consisting of 500 of the largest businesses that are listed on US stock exchanges such as the New York Stock Exchange and the NASDAQ.
Australian investors can access the S&P 500 index through an investment in an exchange-traded fund (ETF) such as iShares S&P 500 ETF (ASX: IVV).
More than a decade ago, before the GFC, legendary investor Warren Buffett of Berkshire Hathaway made a 10-year bet that the S&P 500 would outperform a group of five hedge funds selected by money manager Protégé Partners.
Whoever won the bet would choose a charity for around US$1 million to be donated to.
At the start, each side would put up US$320,000 to be invested in a bond and after 10 years the proceeds would be worth around $1 million. However, thanks to the GFC and falling interest rates (which is good for bond prices) by 2012 the value of the $US320k bond had reached nearly 1 million. Buffett agreed to sell the bond and the money was invested in Berkshire Hathaway B shares.
By the end of the bet at the end of 2017, the value of the Berkshire Hathaway shares, which decided the size of the charity donation, were worth around $2.2 million!
So who won the bet?
According to Fortune, the S&P 500 index fund returned an average compound return of 7.1%. Whereas the group of fund managers chosen by Protégé Partners only returned an average of 2.2%. That meant Warren Buffett won the bet and the charity Girls Inc would use the proceeds to help to cover the expenses for transitional housing for 16 young women who are aging out of foster care.
Why did the S&P 500 fund win?
A couple of key reasons.
The first is that hedge funds charge a high rate of fees compared to a typical ETF, that’s one of the main drawcards for Vanguard.
The second reason is that the biggest businesses in the S&P 500 have actually been the best performers, meaning the index fund ETF’s performance was hard to beat when Apple, Amazon, Alphabet/Google, Microsoft and Facebook were charging higher and higher. This is yet another tick for ETF investing.
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