Many view Warren Buffett as one of the greatest stock pickers of all time, if not the greatest, so you might be surprised to learn that he owns two ETFs in his Berkshire Hathaway (
NYSE:BRK.B
) portfolio. Not only that, but the only two ETFs that he owns are broad market ETFs -- the Vanguard S&P 500 ETF (
NYSEARCA:VOO
) and the SPDR S&P 500 ETF Trust (
NYSEARCA:SPY
).
I’m bullish on these ETFs based on their fantastic long-term track records and their low fees. Plus, if they are worthy of a spot in Buffett's portfolio, they are likely worth a spot in the portfolio of the everyday investor as well. Here are the likely reasons why the Oracle of Omaha owns these ETFs and why they could be good fits for your portfolio as well.
Buffett and Index Funds
VOO is a $347.2 billion low-cost ETF from Vanguard that simply invests in the S&P 500 (
SPX
), an index representing 500 of the largest publicly-traded companies in the U.S. SPY employs the same strategy and is the largest ETF in the market, with $414.2 billion in assets under management (AUM).
While Buffett’s acumen for picking undervalued stocks is legendary, he has long espoused the virtues of low-cost index funds like VOO and SPY.
In 2008, Buffett famously placed a bet with a hedge fund manager that a simple S&P 500 index fund from Vanguard would beat a portfolio of five actively-managed hedge funds over the next 10 years, and Buffett won by a country mile. The S&P 500 fund returned over 125%, while the five actively-managed funds returned an average of just 36.3% net of fees.
Research from Standard & Poor’s shows that this likely wasn’t a fluke -- after five years, 84% of actively-managed large-cap funds underperform their benchmarks, and by 10 years, 90% underperform.
Buffett wrote, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
In fact, Buffett is such a proponent of index funds that he has even reportedly instructed that 90% of the money that his family inherits after he passes away will be invested in low-cost index funds.
Thanks to public data from 13F filings, we can see that Buffett owns about $16.8 million worth of SPY and $16.9 million worth of VOO in Berkshire Hathaway’s portfolio. To be clear, these are relatively small investments for Berkshire Hathaway, given that its portfolio of public equities is worth $313.2 billion, but Buffett clearly likes these ETFs.
VOO and SPY's Top Holdings
The nice thing about these S&P 500 ETFs is that they allow investors to harness the power of 500 of the largest U.S. companies in their portfolios with one simple investment vehicle. This gives investors plenty of diversification as well as exposure to the dynamism of top U.S. companies from all sectors of the economy.
Because they both passively invest in the S&P 500 index, the holdings for VOO and SPY are more or less the same. VOO owns 506 stocks, and its top 10 holdings account for 31.1% of the fund. SPY owns 503 stocks, and its top 10 holdings make up 32.0% of the fund.
Below, you’ll find an overview of
VOO’s top 10 holdings using TipRanks’ holdings tool, as well as an overview of
SPY’s top 10 holdings.
VOO’s Top 10 Holdings
SPY’s Top 10 Holdings
As you can see, both funds own many of the U.S.’s top companies. The holdings for both portfolios feature a strong assortment of Smart Scores. The
Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
Each fund features eight top 10 holdings with Outperform-equivalent Smart Scores of 8 or above, and holdings like Amazon (
NASDAQ:AMZN
), Nvidia (
NASDAQ:NVDA
), Alphabet (
NASDAQ:GOOGL
), and Meta Platforms (
NASDAQ:META
), all score 10 out of 10.
VOO and SPY both boast Outperform-equivalent ETF Smart Scores of 8 out of 10.
Solid Long-Term Performances
In addition to these strong portfolios of top U.S. companies, both VOO and SPY have compiled impressive track records of long-term performance for many years.
VOO has returned 10.3% on an annualized basis over the past three years (as of October 31), 11.0% over the past five, and 11.1% over the past 10. Since its inception in 2010, it has provided annualized returns of 12.9%.
Unsurprisingly, because they both invest in the same index, SPY has produced similar results. Over the past three years, SPY has generated an annualized return of 10.2%. Over the past five years, its annualized return stands at 10.9%, while its 10-year annualized return comes in at 11.0%. SPY is much older than VOO, having launched in 1993, but it has returned an excellent 9.6% on an annualized basis since then.
This return since 1993 is especially impressive when considering that the ETF has gone through the dot-com bubble, the Global Financial Crisis, and the COVID-19 crash all happened within this multi-decade time frame. The fact that SPY has generated such positive results, even with these periods of steep market declines taken into account, truly illustrates the power of long-term investing.
Both ETFs have generated excellent returns over time, highlighting why it has been difficult for the majority of active managers to beat the S&P 500 over the long run.
Low Fees
A stickler for value, Buffett is likely a fan of the low fees that both of these ETFs feature. VOO has an expense ratio of just 0.03%, while SPY charges 0.09%. Both are extremely low fees, but it has to be said that VOO is cheaper.
An investor putting $10,000 into VOO would pay just $3 in fees in year one, while an investor in SPY would pay $9.
Are VOO and SPY Shares Buys, According to Analysts?
Turning to Wall Street, VOO earns a Moderate Buy consensus rating based on 403 Buys, 96 Holds, and eight Sell ratings assigned in the past three months. The
average VOO stock price target of $465.86 implies 12.5% upside potential.
Meanwhile, SPY also earns a Moderate Buy consensus rating based on a nearly identical 403 Buys, 93 Holds, and eight Sell ratings assigned in the past three months. The
average SPY stock price target of $506.71 implies 12.4% upside potential.
The Takeaway: If They’re Good Enough for Buffett…
Both VOO and SPY employ simple strategies of investing in the S&P 500 index, but both have produced excellent results for investors over the long term. They offer diversified exposure to the top stocks in the U.S. market for a minuscule fee. Warren Buffett is a big believer in the power of index funds and likes them enough to include them in his own portfolio, and that’s good enough for me. Of the two funds, I like VOO better because of its lower expense ratio.
Disclosure
Spotify stock (
NYSE:SPOT
) has
rallied by 115% over the past year, yet the market is ignoring a major risk attached to the company's investment case: a continuous lack of meaningful profits with no apparent signs of a turnaround. Despite being the favored music-streaming platform for over 570 million monthly active users, Spotify's growth is paralleled by increasing losses. This raises concerns about the sustainability of its business model and the stock’s valuation. Consequently, I am bearish on the stock.
Wall Street is Overlooking Spotify's Lack of Profits
In my view, Wall Street appears to be overlooking Spotify's
lack of meaningful profits. Moreover, there's a notable absence of a clear roadmap toward achieving sustainable profit margins. In fact, I would argue that Spotify's business model is, to some extent, broken. On the one hand, Spotify's innovative platform enriches the experience for listeners and helps artists grow their audience. On the other hand, narrow profit margins hinder the company's potential to maximize shareholder value.
At the crux of Spotify's cost structure are the substantial royalties paid to artists and record labels, significantly chipping away at the company's revenue and leaving behind meager gross profits. The company's
most recent Q3 results once again underscored this challenge, with Spotify's gross profit margin reaching a modest 26.4%. While the bulls might point to an improvement from last year's 24.7%, the reality is that the margin is still far from the level required for meaningful profit generation.
Evidently, when we factor in Spotify's substantial expenses for R&D, marketing, and administrative costs – a staggering €853 million in the most recent quarter – it becomes apparent that these costs erode almost all of the company's gross profit of €885 million for the period. Consequently, Spotify essentially broke even, posting an operating profit of just €32 million in Q3. This translates to an unimpressive operating profit margin of 1%, easily susceptible to being wiped out by any inflationary impact on expenditures.
Reaccelerating
MAU Growth is Only Half the Picture
One point often raised by optimistic Spotify enthusiasts to explain the recent surge in the stock is the evident acceleration in the company's monthly active user (MAU) growth. Yet, this perspective seems to capture only part of the story, particularly when considering that the heightened pace of MAU additions hasn't translated into a corresponding boost in revenue acceleration. Let's examine.
In Q3, Spotify's monthly active users (MAUs) came in at 574 million, recording a year-over-year increase of 26%. In particular, Premium MAUs grew by 16% to 226 million, while ad-supported MAUs grew by 32% to 361 million. These growth figures compare to 20%, 13%, and 24%, respectively, in Q3 2022, clearly signaling that there should've been a reacceleration in growth. However, revenue growth in Q3-2023 came in at 11%, significantly decelerating from last year's revenue growth of 21%.
Premium subscriber growth rose by 16%, but revenue from premium subscriptions only increased by 10% due to a 6% decline in average revenue per user (ARPU). The company attributed the decline in ARPU to a tough product and market mix, along with FX headwinds. Spotify also noted that price hikes offset these challenges. Still, this makes me wonder whether these price hikes provoked a negative reaction from users (hence the "challenging product and market mix"). This may explain the higher growth in ad-supported accounts compared to the growth in the premium ones.
Examining Spotify's ad-supported revenues reveals a less optimistic picture as well. While the company did show a resurgence in ad-supported MAUs), the growth in Ad-Supported revenue slowed down from 19% the previous year to 16%. Additionally, Spotify's Ad-Supported gross margin stood at 8.3% in Q3. This suggests that considering all other operational expenses associated with the Ad business, such as R&D and marketing, Spotify is likely operating at a loss in the Ad segment.
The Valuation Makes No Sense
Based on Spotify's persistent challenges in achieving noteworthy profit margins and the evident deceleration in its revenue growth, I find the stock's current valuation puzzling. This is particularly true following Spotify's prolonged rally in recent months.
To begin with, Spotify's EPS for the current year is expected to be negative, mainly attributable to significant losses incurred in the first half of the year. But even when considering Wall Street's forward estimates, the valuation remains rather inflated.
To elaborate, projections indicate Spotify is anticipated to report EPS of $1.26 in FY2024, implying a forward P/E of approximately 139x. Despite any optimistic scenarios in which earnings might escalate rapidly, a prospect I find dubious given the ongoing deceleration in revenues, I struggle to perceive how this valuation multiple is reasonable by any means.
Is SPOT Stock a Buy, According to Analysts?
Regarding Wall Street's view on the stock, Spotify Technology has sustained a Moderate Buy consensus rating based on 16 Buys and nine Holds assigned in the past three months. At $188.39, the average
Spotify stock forecast suggests 7% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SPOT stock, the most profitable analyst covering the stock (on a one-year timeframe) is
Mark Mahaney from Evercore ISI, with an average return of 32.79% per rating and a 67% success rate.
The Takeaway
While Spotify's stock has experienced a remarkable surge, the market seems to overlook the critical issue of sustained profitability. The company faces challenges stemming from slim profit margins, hefty royalties, and hefty operational costs, which make me doubt its business model's viability.
Further, despite an uptick in MAUs, revenue growth deceleration and questionable pricing strategies contribute to skepticism. Simultaneously, the stock's current forward valuation appears disproportionately high, given the persistent hurdles in achieving substantial profits. Considering these concerns, I believe that a cautious stance towards Spotify's investment case is warranted. Therefore, I remain bearish on the stock.
Disclosure
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If there’s one area of the market that billionaire Microsoft (
NASDAQ:MSFT
) founder Bill Gates knows inside and out, it’s the technology sector. So, it caught my eye when Gates added a new tech ETF to the Trust’s portfolio, according to the 13F filings that just came out. According to the filing, the Bill and Melinda Gates Foundation Trust purchased the iShares U.S. Technology ETF (
NYSEARCA:IYW
) during the third quarter.
I’m bullish on IYW based on its compelling track record of long-term performance and its comprehensive portfolio of top U.S. tech companies.
Bill Gates, The Investor
Bill Gates is best known as the founder of Microsoft. He is also one of the richest people in the world. Bloomberg estimates that Gates has a net worth of over $130 billion.
What’s less known is the fact that Gates is also an avid investor through the Bill and Melinda Gates Foundation Trust, which has a portfolio value of approximately $38 billion.
Gates has a close relationship with Warren Buffett, who is widely acknowledged as one of the greatest investors of all time, if not the greatest, so Gates has learned from the best. Warren Buffett is a trustee for the Foundation, and the two frequently play "bridge" (a card game) together to stay sharp. Furthermore, about 20% of the Bill and Melinda Gates Foundation’s portfolio is invested in Buffett’s Berkshire Hathaway (
NYSE:BRK.B
).
Thanks to 13F filings, we get a snapshot of what investors like Gates are doing with their portfolios once a quarter. Institutional investors with over $100 million in assets under management must file a 13F within 45 days of the end of the previous quarter. Many investors look forward to the release of these 13Fs, as they provide some insight into what moves the "smart money" is making.
In its most recent 13F, we can see that Gates added a bevy of new tech stocks to the portfolio, including Apple (
NASDAQ:AAPL
), Amazon (
NASDAQ:AMZN
), and Adobe (
NASDAQ:ADBE
), as well as the iShares U.S. Technology ETF. To be clear, this isn’t a huge position for Gates. According to the filing, he owns about $6 million worth.
But its inclusion is notable, nevertheless, as it is one of the few ETFs Gates owns, and he clearly has his finger on the pulse of the tech sector. Therefore, let’s take a closer look at this tech-oriented ETF that caught Gates’ eye.
What is the IYW ETF’s Strategy?
iShares says that IYW “seeks to track the investment results of an index composed of U.S. equities in the technology sector.” It gives investors “exposure to U.S. electronics, computer software and hardware, and informational technology companies.”
The fund was launched in 2000 and now has $12.6 billion in assets under management.
IYW’s Portfolio
IYW’s portfolio is a comprehensive collection of the U.S.’s top technology companies. Altogether, the ETF owns 134 stocks, and its top 10 holdings make up 64.2% of the fund. Below, you can check out an overview of
IYW’s top 10 holdings using TipRanks’ holdings tool.
The list of holdings reads like a roll call of the U.S.’s best and brightest tech companies. Apple is the fund’s largest holding, followed by Microsoft, which Gates should know well. Other top holdings unsurprisingly include additional FAANG names like Meta Platforms (
NASDAQ:META
) and Alphabet (
NASDAQ:GOOG
) (
NASDAQ:GOOGL
), as well as leading semiconductor names like Nvidia (
NASDAQ:NVDA
), Advanced Micro Devices (
NASDAQ:AMD
), and Broadcom (
NASDAQ:AVGO
).
Collectively, IYW’s top holdings feature an impressive collection of Smart Scores. The
Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. Impressively, each and every one of IYW’s top 10 holdings features an Outperform-equivalent Smart Score of 8 or above.
Alphabet, Nvidia, Meta Platforms, and Advanced Micro Devices, and Broadcom all boast
‘Perfect 10’ Smart Scores. IYW itself features an Outperform-equivalent ETF Smart Score of 8.
Long-Term Excellence
In addition to this strong portfolio, IYW has been a
great performer for a long time. IYW is up an incredible 49.5% over the past year as tech stocks have surged. Over the past three years, it has returned a very respectable 12.8% on an annualized basis (as of October 31).
Looking further out, IYW’s returns are excellent. Over the past five years, it has provided investors with an annualized return of 19.2%, and over the past decade, it has returned 18.6% on an annualized basis.
Looking at it another way, on a cumulative basis, an investor who put $10,000 into IYW 10 years ago would have nearly $46,000 today.
Expense Ratio
IYW’s expense ratio of 0.40% isn't great, but it's not exorbitant either. An investor putting $10,000 into the fund would pay $40 in fees during year one. Assuming that the expense ratio remains at 0.40% and that the fund returns 5% per year going forward, this investor would pay $505 in fees over the course of a 10-year investment in the fund.
On the one hand, there are plenty of tech-centric ETFs, such as the various ARK ETFs, that charge much more than this. But on the other hand, there are other large tech ETFs, such as the Invesco QQQ Trust (
NASDAQ:QQQ
) and the Technology Select Sector SPDR Fund (
NYSEARCA:XLK
), with cheaper expense ratios.
Is IYW Stock a Buy, According to Analysts?
Turning to Wall Street, IYW earns a Moderate Buy consensus rating based on 112 Buys, 23 Holds, and zero Sell ratings assigned in the past three months. The
average IYW stock price target of $126.16 implies 9.55% upside potential.
Gates Could be on to Something
We don’t know exactly why Gates added IYW to his portfolio during the past quarter. However, the ETF’s highly-rated portfolio of top U.S. technology stocks and its stellar long-term track record are good reasons to consider investing in it.
Gates certainly has a good overview of what is going on in the U.S. tech sector, and he clearly feels that there is still plenty of opportunity in these types of stocks. This ETF is a convenient and effective way to invest in all of them. The only downside of IYW is that its expense ratio is a bit higher than some of its peers. Nevertheless, with the type of long-term performance it has put up, it’s unlikely that many investors are complaining about the 0.40% expense ratio.
Disclosure
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Chip companies have been in focus this year due to the massive opportunity created by the
generative artificial intelligence ambitions of tech giants following the success of
OpenAI’s ChatGPT. Further, after suffering for several quarters, many semiconductor companies could benefit from the gradual recovery expected in the PC market next year. Bearing this backdrop in mind, we used
TipRanks’ Stock Comparison Tool to place Advanced Micro Devices (
NASDAQ:AMD
), Nvidia (
NASDAQ:NVDA
), and Intel (
NASDAQ:INTC
) to find the best chip stock as per Wall Street experts.
Advanced Micro Devices (NASDAQ:AMD)
While Nvidia has stolen the limelight from all other semiconductor stocks this year due to the demand for its graphics processing units (GPUs) in generative AI, several analysts remain bullish about Advanced Micro Devices’ potential to grab the opportunities in the generative AI space.
The company is expected to benefit in the upcoming quarters from the demand for its latest MI300 chips and recovery in the PC market. During the
Q3 earnings call, management said that it expects AMD's Data Center GPU revenue to be about $400 million in the fourth quarter and surpass $2 billion in 2024, backed by the demand for MI300 chips. This, as per the company, would make MI300 its fastest product to ramp to sales of $1 billion.
Is AMD a Buy, Sell, or Hold?
On November 13,
Roth MKM analyst Sujeeva De Silva initiated coverage of AMD stock with a price target of $125. The analyst pointed out that AMD’s premium valuation of P/E (price-to-earnings multiple based on calendar year 2024 earnings estimates) of 33x, compared to the overall technology peers' average P/E of 26x, reflects the company’s relative growth opportunity.
De Silva believes that the company’s differentiated portfolio of high-performance compute and networking processors and accelerators represent a solid investment opportunity. He added that the company is well-positioned from a product portfolio point of view to address the growing data center infrastructure market. Also, checks by the analyst’s firm reveal that AMD is poised to win further market share in the cloud server space and is making progress in the enterprise market.
With 23 Buys and seven Holds,
AMD scores Wall Street’s Strong Buy consensus rating. At $127.13, the average price target suggests a modest upside potential of 5.4%.
Shares have jumped more than 86% so far in 2023.
Nvidia (NASDAQ:NVDA)
This year has been a remarkable one for Nvidia. The generative AI-induced demand for the company’s advanced GPUs has helped NVDA deliver stellar results in recent quarters and triggered a
237% year-to-date rally in the stock. The company’s GPUs are being used by several tech giants to build and train generative AI models.
Following the robust performance in the first half of the fiscal year, expectations are high from Nvidia’s fiscal third-quarter results, scheduled to be announced on November 21. Analysts expect the company’s Q3 FY24 revenue to surge 173% year-over-year, backed by solid Data Center business. This revenue growth estimate reflects further acceleration in NVDA’s top-line growth compared to 101% in Q2 FY24. Wall Street expects
adjusted EPS to jump to $3.37 in Q3 FY24 from $0.58 in the prior-year quarter.
What is NVDA Price Target?
At the recently held Supercomputing 23 event, Nvidia unveiled its HGX H200 AI accelerator, which is an upgrade to the H100.
Bank of America analyst Vivek Arya noted that the H200 is compatible with its predecessor H100 installations, which will facilitate faster time to market and is in fact "critical," given that hyperscalers do not need to invest to reconfigure their existing hardware platform to the upgraded offering.
Arya believes that upgrade simplicity enhances the competitive portfolio that Nvidia holds. Calling NVDA his “top pick,” the analyst reiterated a Buy rating on the stock with a price target of $650 on November 13.
Including Arya, 37 analysts have a Buy recommendation for Nvidia while only one analyst has a Hold rating. The average price target of $648.01 implies 31.5% upside potential.
Intel (NASDAQ:INTC)
Intel shares have rallied more than 21% over the past one month and
are up 66% year-to-date. The company’s better-than-projected third-quarter performance impressed investors. The company’s
adjusted EPS increased nearly 11% to $0.41 per share, easily exceeding analysts’ adjusted EPS estimate of $0.22.
Despite an
8% decline in Q3 2023 revenue to $14.2 billion, adjusted EPS increased due to the company’s expense discipline. After losing market share to rivals like AMD in recent years, Intel is now focusing on improving the competitiveness of its offerings and streamlining its business. The company also aims to improve its profitability and is targeting cost savings of $8 billion to $10 billion by 2025.
What is the Prediction for Intel Stock?
Mizuho analyst Vijay Rakesh recently upgraded Intel stock, citing many upcoming server product rollouts and foundry customer announcements. That said, most analysts remain cautious about Intel, including
Morgan Stanley analyst Joseph Moore.
In late October, Moore raised his price target for Intel to $39 from $35 and reiterated a Hold rating on the stock. While the analyst acknowledged that Q3 was a good quarter for Intel mainly due to PCs, he thinks that the "data center malaise" continued in the quarter. Consequently, he kept his second-half estimates essentially unchanged. While Moore expects the recent results to benefit the stock over the near term, he contends that for Intel the "focus is the roadmap, not numbers."
Overall, Wall Street’s Hold consensus rating on INTC stock is based on five Buys, 18 Holds, and four Sells. The average price target of $37.39 implies a possible downside of 14.6% from current levels.
Conclusion
Analysts are bullish on Advanced Micro Devices and Nvidia, while they are sidelined on Intel, as many think that there is much more to be done for the company to improve its competitiveness in the chip market. Despite the phenomenal year-to-date rally in Nvidia shares, Wall Street continues to see higher upside potential in the stock than AMD and Intel.
Disclosure
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