Two S&P 500 ETFs for a Forever Portfolio: A Value Investor's Guide

For the disciplined investor, the goal is not to chase the next hot stock, but to capture the long-term growth of the American economy itself. The S&P 500 index, and a low-cost ETF that tracks it, provides the most straightforward path to that objective. The historical record is compelling: over a nearly 90-year period, the S&P 500 has delivered average annual returns of about 10%. This isn't a fleeting trend; it's the compounding power of a broad slice of corporate America working over generations.

This approach is not new wisdom, but a principle endorsed by one of the greatest investors of all time. Warren Buffett, the Oracle of Omaha, has repeatedly advised that most investors should just buy the S&P 500 index and hold forever. His rationale is simple and powerful: the index is designed to track the U.S. economy, comprising large, economically significant businesses across all major industries. By owning it, you own a piece of the nation's productive capacity, which has a long history of steady expansion.

The practical implication for the average investor is clear. Over the long term, it is incredibly difficult to assemble a portfolio that outperforms the S&P 500. The effort required to consistently beat the market-through stock-picking, market timing, or sector rotation-typically consumes more time and energy than it returns in net gains, especially after fees. For a patient, long-term thinker, the prudent default choice is often the simplest one: a low-cost S&P 500 ETF. It provides instant, diversified exposure to the entire U.S. stock market, removing the need to pick winners and losers. In this light, the ETF isn't just an investment tool; it's the foundation of a forever portfolio.

The Two Contenders: VOO vs IVV

For the investor committed to a forever holding, the choice between the two leading S&P 500 ETFs-Vanguard's VOO and State Street's IVV-comes down to a single, critical factor: cost. Both are designed to track the same index, the S&P 500, which weights its 500 constituents by free float market capitalisation. This means they concentrate exposure on the largest, most profitable companies in the U.S. economy, a structure that aligns perfectly with a value investor's focus on durable, market-leading businesses.

The primary difference is the annual fee. VOO, managed by Vanguard, carries a gross expense ratio of 0.0945%. IVV, the SPDR S&P 500 ETF, offers a lower cost at 0.03% per annum. This gap, while seemingly small, compounds over decades. For a $100,000 investment, the difference in annual fees is about $64. Over a 30-year horizon, that $64 becomes a significant drag on the final portfolio value due to lost compounding.

From a value perspective, the lower cost of IVV represents a clear advantage. It directly increases the investor's net return, enhancing the long-term compounding potential of the forever portfolio. Both funds are market-cap-weighted and have substantial assets under management, ensuring liquidity and tight tracking of the index. The choice, therefore, is a straightforward application of the value principle: minimize frictional costs to maximize the return on the underlying business. For a patient investor, the lower-cost option is the more efficient vehicle for capturing the market's long-term growth.

The Value Investor's Checklist

For the patient investor, the selection process is less about finding a perfect stock and more about choosing a vehicle that embodies timeless principles. The S&P 500 ETF is not a stock, but its underlying index possesses a durable competitive advantage-a wide moat-that is its greatest strength. This moat is not built on patents or brand loyalty, but on its very design. The index is hand-selected to represent the entire U.S. economy, spanning all major industries. This broad diversification across 11 sectors is the ultimate risk mitigant. It reduces single-stock vulnerability and ensures the portfolio's fate is tied to the nation's long-term economic expansion, not the fortunes of a handful of companies. In a value framework, this is a moat of breadth and necessity.

The second critical factor is the relentless, invisible tax of cost. Over a 30-year horizon, a seemingly trivial 0.05% difference in annual expense ratio can erode tens of thousands of dollars in potential portfolio value. This is the direct application of the compounding principle: fees are a drag that compounds against the investor's gains. For a forever portfolio, this is not a minor detail; it is a material factor that determines the final outcome. The choice between VOO and IVV, therefore, is a direct test of the value investor's discipline-minimizing friction to maximize the return on the underlying business.

Finally, the market-cap-weighted structure of these ETFs aligns with a core tenet of value investing: owning the largest, most economically significant businesses. The index weights its constituents by free float market capitalisation, meaning the biggest companies have the greatest impact. This structure implicitly endorses the principle of concentrating on durable market leaders. It is a practical application of Warren Buffett's advice to buy the S&P 500, which he champions because it grows with the U.S. economy. In this light, the ETF is not a passive index tracker but a disciplined vehicle for owning the nation's most important enterprises, one that compounds their long-term success for the patient investor.

The $100 Starting Point

For the new investor, the most important step is simply to begin. The power of compounding starts with that first dollar, not the perfect ETF choice. With a $100 starting point, the practical path is clear: both VOO and IVV are available for fractional share purchases through major online brokerages. This feature removes the barrier of a high per-share price, making it straightforward to invest the entire sum immediately. The act of putting money to work is the primary goal; the decision between these two funds is a secondary, manageable detail.

The next step is selecting a brokerage. The key is to choose a platform with low or no trading commissions and easy access to these specific ETFs. Fortunately, most of the best brokers for ETF investing now offer commission-free trades on a wide range of funds, including both VOO and IVV. This minimizes friction and ensures your $100 is working for you, not paying fees. The focus should be on simplicity and cost efficiency from the outset.

In the end, the exact ETF chosen between VOO and IVV matters less than the discipline to start. The historical record shows that over the long term, it is incredibly difficult to assemble a portfolio that outperforms the S&P 500. By investing in a low-cost, market-cap-weighted ETF like VOO or IVV, you are directly applying the timeless advice of Warren Buffett: buy the index and hold forever. For a patient investor, the $100 is not just an investment-it's the first brick in a forever portfolio.

Conclusion: The Actionable Takeaway

For the value investor, the choice is not between two stocks, but between two excellent, low-cost vehicles: Vanguard's VOO and State Street's IVV. Both are designed to track the same index, the S&P 500, which is a hand-selected slice of the U.S. economy. This structure provides a wide moat of diversification and long-term compounding, as advised by Warren Buffett himself.

Given the importance of cost for long-term compounding, IVV's lower 0.03% expense ratio makes it the marginally more efficient choice. While the difference on a $100 investment is small, it is a direct application of the value principle: minimize friction to maximize the return on the underlying business. Over decades, this efficiency compounds into a meaningful advantage.

The ultimate decision is straightforward. With your $100, buy either VOO or IVV. Hold them forever. Let the power of the U.S. economy, as represented by its largest and most significant businesses, compound over time. This is the disciplined, patient path to building a forever portfolio.