Billionaires Buy 2 Magnificent Index Funds That a Wall Street Analyst Says Could Soar 132%

The S&P 500 (^GSPC -0.64%) is one of three major U.S. stock indexes, but it is viewed as the best benchmark for the overall market due to its scope and diversity. It covers 500 large companies, comprising value stocks and growth stocks, from all 11 market sectors.

Tom Lee, head of research at Fundstrat Global Advisors, expects the index to hit 15,000 by 2030. That implies 132% upside from its current level of 6,460. Investors can position their portfolios to benefit by owning an S&P 500 index fund such as the Vanguard S&P 500 ETF (VOO -0.64%) or the SPDR S&P 500 ETF Trust (SPY -0.64%).

The hedge fund managers listed below, all of whom are billionaires, bought shares of one or both S&P 500 index funds in the second quarter.

• Cliff Asness at AQR Capital Management purchased 72,200 shares of the SPDR S&P 500 ETF Trust and 134,800 shares of the Vanguard S&P 500 ETF, though both positions are relatively small.
• Israel Englander at Millennium Management added 1.2 million shares of the SPDR S&P 500 ETF Trust, which now ranks as his seventh-largest position, excluding options.
• Paul Tudor Jones added 1.8 million shares of the SPDR S&P 500 ETF Trust, which now ranks as his largest position, excluding options. He also added 36,700 shares of the Vanguard S&P 500 ETF.
• Tom Steyer at Farallon Capital Management purchased 5.5 million shares of the SPDR S&P 500 ETF Trust, which now ranks as his largest position.

Importantly, even investors who prefer to own individual stocks can benefit from holding an S&P 500 index fund. Here are the important details.

Image source: Getty Images.

The difference between the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust

The Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust track the S&P 500, which itself includes about 80% of U.S. stocks and 40% of global stocks by market value. So, both index funds provide exposure to an identical list of companies. The top 10 positions are listed by weight below:

1. Nvidia: 7.9%
2. Microsoft: 6.8%
3. Apple: 6.2%
4. Alphabet: 4%
5. Amazon: 3.9%
6. Meta Platforms: 2.9%
7. Broadcom: 2.6%
8. Tesla: 1.7%
9. Berkshire Hathaway: 1.6%
10. JPMorgan Chase: 1.5%

So, what’s the difference between the S&P 500 index funds? The SPDR S&P 500 ETF Trust is more liquid, meaning shares are more easily traded because it consistently has a narrower bid-ask spread and higher trading volume.

However, the Vanguard S&P 500 ETF is still very liquid and has a much lower expense ratio of 0.03%, meaning shareholders will pay just $3 per year for every $10,000 invested in the fund. Comparatively, the SPDR S&P 500 ETF Trust has an expense ratio of 0.0945%.

The investment thesis for S&P 500 index funds

I think most investors should own an S&P 500 index fund, provided they have a time horizon of at least three to five years. That applies to investors who prefer individual stocks. I’ve summarized my reasoning in three points below.

1. The S&P 500 has consistently produced strong returns

The S&P 500 has advanced 1,910% over the last three decades, compounding at 10.5% annually. At that pace, $500 invested monthly in an S&P 500 index fund would be worth about $97,000 in one decade, $363,000 in two decades, and $1 million in three decades.

Additionally, the S&P 500 has never declined over any 15-year period since its inception in 1957. That means anyone who bought an S&P 500 index fund at any point in history made money, so long as they held the fund for at least 15 years.

2. Very few professional investors beat the S&P 500

Nearly 85% of large-cap funds underperformed the S&P 500 over the last decade, and nearly 90% underperformed over the last 15 years, according to S&P Global. In other words, even professional money managers struggle to beat the index over long periods because picking individual stocks is a challenging endeavor.

So, investors who prefer individual stocks can hedge against underperformance by owning an S&P 500 index fund. If your individual stocks beat the index, then your entire portfolio will outperform. But if your individual stocks lose to the index, your portfolio could still generate decent returns.

3. Tom Lee thinks the S&P 500 will reach 15,000 by 2030

Tom Lee says there are two reasons the S&P 500 could hit 15,000 by 2030. First, millennials are the largest living generation, and they are reshaping the economy as they enter their peak earnings years. They are also set to inherit over $40 trillion, the largest generational wealth transfer in history.

Second, the global labor shortage is forecast to reach 80 million workers by 2030, creating strong demand for artificial intelligence (AI) as a means of automating workflows. Consequently, Lee expects a parabolic move in the technology sector, which accounts for 34% of the S&P 500 by market value.