Buffett sells Berkshire’s stake in S&P 500 ETF

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Warren Buffett’s Berkshire Hathaway recently released its fourth-quarter portfolio changes, revealing that the company sold its stake in an S&P 500 ETF. This move surprised many investors, as Buffett often recommends S&P 500 index funds as the best way for most people to invest in U.S. stocks. Wall Street analysts expect the S&P 500 to soar from its current level of around 6,010 in the coming months and years. The index has a bottom-up target price of 6,920, implying a 15% upside over the next year.

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Some analysts, like Tom Lee at Fundstrat Global Advisors, believe the S&P 500 could reach 15,000 by 2030, a total return of 150% from its present level. Despite these promising projections, Buffett chose to sell Berkshire Hathaway’s entire stake in the S&P 500 ETF during the fourth quarter.

Found this interesting in Uncle Warren's letter.

Buffett has been a net-seller of equities for the ninth consecutive quarter. Yet the S&P 500 has been higher 8 of the past 9 quarters.

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He sold the only two index funds in Berkshire’s portfolio, both of which were S&P 500 index funds purchased in the fourth quarter of 2019.

Buffett’s strategic portfolio adjustment

However, this decision does not necessarily indicate a loss of confidence in the U.S. stock market or the American economy. Instead, it reflects Buffett’s long-stated goal of growing Berkshire’s per-share value more quickly than the S&P 500’s growth rate, which is not achievable by holding S&P 500 index funds. Moreover, Berkshire Hathaway had relatively little invested in S&P 500 index funds, with just $45 million between two ETFs in the third quarter, representing less than 0.02% of Berkshire’s $266 billion equities portfolio. Selling these funds could have been a move to consolidate minor positions into cash. In conclusion, while Buffett’s decision to sell S&P 500 index funds may seem alarming, investors should not overreact. Buffett’s recommendation of S&P 500 index funds for general investors remains unchanged, as does the long-term potential for these funds. Valuations might be elevated in the short term, which could lead to volatility, but history suggests that patient investors in S&P 500 index funds are likely to be rewarded over time. Image Credits: Photo by m. on Unsplash