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"Comparing Berkshire Hathaway and SPY ETF: Can Buffett's Company Outperform the S&P 500 Index?"

While investors often focus on the tech giants of the "Magnificent Seven," Warren Buffett's Berkshire Hathaway quietly outperforms the SPDR S&P 500 ETF Trust (SPY), a stock market proxy and the largest exchange-traded fund in the market.

As a conglomerate holding company with stakes in 41 publicly traded companies, Berkshire Hathaway exhibits qualities similar to an ETF, making for an interesting comparison with SPY and other S&P 500 index-tracking ETFs.

In this article, we delve into the key similarities and differences between Berkshire Hathaway stock and the SPY ETF.

What is Berkshire Hathaway?

Berkshire Hathaway is a multinational conglomerate headquartered in Omaha, Nebraska. Under the leadership of co-founder, Chairman, and CEO Warren Buffett, Berkshire Hathaway has gained renown for its successful value investing and long-term outperformance in the market, earning Buffett the nickname "Oracle of Omaha."

Here are some key features of Berkshire Hathaway:

History and Structure:

Founded in 1839 as a textile manufacturer, the company transformed into a conglomerate under Buffett's leadership in the 1960s.

Berkshire Hathaway does not directly manufacture or sell products; instead, it holds a diversified portfolio of subsidiary companies and equity investments across various industries.

Investment Strategy:

Known for its value investing philosophy, Berkshire Hathaway focuses on acquiring undervalued companies with strong long-term potential.

For its holdings, Berkshire prioritizes financial strength, stable operations, and exceptional management, often holding investments for the long term.

What Does Berkshire Hathaway Own?

Berkshire Hathaway owns a diverse range of businesses, including wholly-owned subsidiaries like GEICO and investments in utilities and railroads. Its top holdings include companies like Apple, Amazon, and American Express.

Performance and Reputation:

Berkshire Hathaway boasts a long history of successful investment performance, generating substantial returns for shareholders under Warren Buffett's leadership.

According to U.S. News & World Report, from 1965 to 2022, Berkshire Hathaway stock had an average annual compounded growth rate of 20%, compared to the S&P 500 index's annualized return of 9.9% over the same period.

What is SPY ETF?

SPY ETF is the SPDR S&P 500 ETF Trust, one of the world's largest and most widely traded exchange-traded funds with assets under management exceeding $500 billion. It passively tracks the performance of the S&P 500 index, representing the 500 largest publicly traded companies in the United States.

Diversification:

With holdings in hundreds of companies, SPY offers instant diversification across different industries and sectors, reducing risk compared to investing in individual stocks.

Low Expenses:

Compared to actively managed funds, expenses for ETFs like SPY are typically lower. The expense ratio covers the operational costs of the ETF. For SPY, the expense ratio is around 0.095%, meaning a $10,000 investment costs $9.50 annually. Some S&P 500 ETFs have expense ratios as low as 0.03%.

Liquidity:

SPY is highly liquid, allowing for easy buying and selling on the stock exchange throughout the trading day.

Historical Performance:

SPY's performance closely tracks the S&P 500 index. Historically, the S&P 500 index has outperformed over 80% of large-cap mutual funds, but there are also periods of volatility.

Berkshire Hathaway Stock vs. SPY:

Here's a direct comparison between Berkshire Hathaway (BRK.A and BRK.B) and SPDR S&P 500 ETF Trust (SPY):

Investment Approach:

Berkshire Hathaway: Focuses on value investing, selecting undervalued individual companies with strong long-term potential, managed by Warren Buffett and his team with a focus on long-term holding.

SPY ETF: Passively tracks the S&P 500 index, providing exposure to the performance of the 500 largest publicly traded companies in the United States.

Diversification:

Berkshire Hathaway: Holds a concentrated portfolio of about 40 wholly-owned subsidiaries and substantial equity investments across various sectors. While diversified, it's not as diversified as the S&P 500 ETF.

SPY ETF: Offers instant diversification across sectors of the U.S. economy with its 500-company exposure. Due to its market-cap weighting, the largest allocations tend to be in large tech stocks like Apple, Microsoft, and Nvidia.

Expenses:

Berkshire Hathaway: No management fees.

SPDR ETF: Has a relatively low expense ratio of 0.09%, covering the management costs of the ETF. Other S&P 500 ETFs like iShares S&P 500 Index (IVV) and Vanguard S&P 500 ETF (VOO) have even lower expense ratios of 0.03%.

Liquidity:

Berkshire Hathaway: BRK.A stock has a very high price, exceeding $600,000 per share, making it less accessible to many investors. BRK.B shares are more affordable at slightly over $400 per share but come with limited voting rights.

SPY ETF: Offers high liquidity with narrow bid-ask spreads, facilitating easy buying and selling.

Historical Performance:

Berkshire Hathaway: Historically outperformed the S&P 500 index under Warren Buffett's leadership. However, past performance does not guarantee future results.

SPY ETF: Reflects the historical performance of the S&P 500 index, which, despite periods of volatility, has achieved sustained growth over the long term and outperformed over 80% of professional fund managers.

Valuation:

Berkshire Hathaway: As of May 6, 2024, the company's price-to-earnings ratio is 9.1 according to Y Charts.

SPY ETF: As of May 2, 2024, the average price-to-earnings ratio for SPY is 20.8 according to Morningstar.

Choosing Between Berkshire Hathaway and SPY ETF:

For investors who believe in Warren Buffett's investment philosophy and are willing to concentrate their holdings, Berkshire Hathaway may be a choice. However, due to the high price of BRK.A shares, BRK.B may be more accessible for some investors, albeit with limited voting rights.

For investors preferring a diversified, low-cost approach that tracks the overall market, SPY is a suitable choice. Additionally, SPY provides potential dividend income, while Berkshire Hathaway does not pay dividends.

Before purchasing any investment, investors should understand their investment objectives, time horizon, and risk tolerance.