Berkshire Hathaway Stock vs SPY: Which Is Best?
While investors have focused on high-flying Magnificent 7 stocks, Warren Buffett’s Berkshire Hathaway has quietly outperformed the SPDR S&P 500 ETF Trust (SPY), the stock market proxy and largest exchange-traded fund on the market.
As a conglomerate that owns shares of 41 publicly traded companies, Berkshire possesses multiple ETF qualities and makes for an interesting comparison to SPY and other ETFs tracking the S&P 500.
In this educational article, we break down the key similarities and differences between Berkshire Hathaway Stock and the SPY ETF.
What Is Berkshire Hathaway?
Berkshire Hathaway Inc. is a multinational holding company headquartered in Omaha, Nebraska. Led by co-founder, chairman and CEO Warren Buffett, Berkshire has built a reputation for successful value investing and long-term outperformance of the broader stock market, hence Buffett’s “Oracle of Omaha” nickname.
Here's a breakdown of Berkshire Hathaway's key characteristics:
History and Structure
Founded in 1839 as a textile manufacturer, it transformed into a conglomerate under Buffett's leadership in the 1960s.
Berkshire Hathaway doesn't directly manufacture or sell products. Instead, it owns a diverse portfolio of subsidiaries and equity investments in various sectors.
Investment Strategy
Berkshire Hathaway is known for its value investing philosophy, focusing on acquiring undervalued companies with strong long-term potential.
For companies it owns, Berkshire prioritizes financial strength, stable businesses, and excellent management, and it often holds its investments for long periods.
What Berkshire Hathaway Owns
Berkshire Hathaway owns a wide range of businesses, including insurance companies like its wholly owned subsidiary, GEICO, as well as utilities and railroads. Top stock holdings include Apple Inc., Amazon.com Inc., and American Express Co.
Performance and Reputation
Berkshire Hathaway has a long history of successful investment performance, generating significant returns for shareholders under Warren Buffett's leadership.
From 1965 to 2022, Berkshire Hathaway stock averaged a 20% compound annual growth rate, which compares to 9.9% annualized return for the S&P 500 in that period, according to U.S. News.
What Is the SPY ETF?
The SPY ETF is the SPDR S&P 500 ETF Trust, the largest and one of the most widely traded exchange-traded funds in the world with over $500 billion in assets under management. It passively tracks the performance of the S&P 500 index, which represents the 500 largest publicly traded companies in the United States.
Diversification
Since SPY holds hundreds of companies, it offers instant diversification across different industries and sectors. This diversification helps mitigate risk compared to investing in individual stocks.
Low Expenses
Compared to actively managed funds, ETFs like SPY typically have lower expense ratios. The expense ratio covers the operational costs of the ETF. In the case of SPY, the expense ratio is around 0.095%, which translates to $9.50 per year for a $10,000 investment. Some S&P 500 ETFs have expense ratios as low as 0.03%.
Liquidity
SPY is a highly liquid ETF, meaning you can easily buy and sell shares on a stock exchange throughout the trading day.
Performance
SPY's performance is directly tied to the S&P 500 index. Historically, the S&P 500 has outperformed more than 80% of large-cap stock funds over the long term, but with periods of volatility.
Berkshire Hathaway Stock vs SPY
Here's a head-to-head comparison of Berkshire Hathaway (BRK.A & BRK.B) and the SPDR S&P 500 ETF Trust (SPY):
Feature | Berkshire Hathaway Stock | SPDR S&P 500 ETF Trust (SPY) |
Investment Style | Value investing, actively managed | Growth/Value blend, passively managed |
Diversification | Concentrated portfolio | Highly diversified |
Fees | No management fees | Low expense ratio (0.095%) |
Liquidity | BRK.A low, BRK.B more liquid | Highly liquid |
Performance | Historically outperformed S&P 500 | Historically outperformed average large-cap fund |
Valuation | 9.1 P/E ratio | 20.8 P/E ratio |
Market Cap | $870 billion | $507 billion |
Dividends | Does not pay dividends | Has historically paid quarterly dividend |
Data as of May 3, 2024, from Morningstar and Y Charts.
Investment Approach
Berkshire Hathaway: Focuses on value investing, selecting individual companies believed to be undervalued with strong long-term potential. Managed by Warren Buffett and his team, with a focus on long-term holding periods.
SPY ETF: Passively tracks the S&P 500 index, providing exposure to the performance of the 500 largest U.S. publicly traded companies.
Diversification
Berkshire Hathaway: Owns a concentrated portfolio of approximately 40 wholly owned subsidiaries and significant equity investments in various sectors. While diverse, it's not as diversified as an S&P 500 ETF.
SPY ETF: Provides instant diversification across 500 companies in various sectors of the US economy. Since it’s cap-weighted, the heaviest allocations lean toward mega-cap tech stocks like Apple, Microsoft Corp., and Nvidia Corp.
Fees
Berkshire Hathaway: Doesn't charge management fees.
SPDR ETF: Has a low expense ratio of 0.09%, which covers the costs of managing the ETF. Other S&P 500 ETFs, such as the iShares S&P 500 Index (IVV) and Vanguard S&P 500 ETF (VOO), have lower expense ratios at 0.03%.
Liquidity
Berkshire Hathaway: BRK.A shares are very expensive at over $600,000 per share, making them less accessible to many investors. BRK.B shares are more affordable at just above $400 per share but have limited voting rights.
SPY ETF: Highly liquid with tight bid-ask spreads for easy buying and selling.
Historical Performance
Berkshire Hathaway: Has historically outperformed the S&P 500 over the long term under Warren Buffett's leadership. However, past performance doesn't guarantee future results.
SPY ETF: Reflects the historical performance of the S&P 500 index, which has generated consistent growth and outperformed more than 80% of professional money managers in the long term, albeit with periods of volatility.
Valuation
Berkshire Hathaway: The company’s price-earnings ratio was 9.1, as of May 6, 2024, according to Y Charts.
SPY ETF: The average holding P/E ratio for SPY was 20.8, as of May 2, 2024, according to Morningstar.
Choosing Between Berkshire Hathway and the SPY ETF
Investors who have faith in Warren Buffett's investment philosophy and are comfortable with a concentrated holding, Berkshire Hathaway might be an option. However, due to the high price of BRK.A shares, BRK.B might be more accessible for some investors, though they come with limited voting rights.
Investors preferring a diversified, low-cost approach that tracks the overall market, SPY is a suitable choice. In addition, SPY offers potential dividend income while Berkshire Hathaway doesn't pay dividends.
Before buying shares of either investment, investors should their investment goals, time horizon, and risk tolerance.
