Berkshire Hathaway, S&P 500 ETF and Russell 2000 Index Compared

When looking to seek out top-performing shares and funds, investors can be forgiven for thinking that the S&P 500 is the be all and end all of places to consider. In the interests of analysis, and looking to maximise returns, it is always worth taking stock of a few options, as the markets are not one-size-fits-all.

A point of interest in this pursuit is the performance comparison between the S&P 500 as a proxy for the broader market and the health of the interconnected global economy, the Russell 2000 to give us a picture on the health of the US economy, and an individual stock such as Berkshire Hathaway (NYSE: BRK.B) that careful curates a portfolio of handpicked equities.

Berkshire Hathaway , the storied company headed by Warren Buffett is one that is often talked about, and despite the fact that it has outperformed in many areas, there are certain types of assets that the firm does not tend to get involved in.

Berkshire Hathaway, dating back to 1839 and headquartered in Omaha, Nebraska, has been a beacon of value investing. Under Warren Buffett’s leadership, it has acquired an extensive portfolio of subsidiaries and equity investments, ranging from insurance and energy to transportation and consumer products.

The company’s investment approach has been lucrative for its shareholders, as evidenced by an impressive 20% compound annual growth rate from 1965 to 2022. This performance markedly overshadows the S&P 500’s annualised return of 9.9% during the same period.

The Russell 2000 Index encompasses 2000 small cap US companies within it’s index. It was launched by the Frank Russell Company back in 1984, and is now managed by FTSE Russell. Many trade ‘the Russell’ via the ETF, so there is the option to consider options and futures in the US.

Investors and market analysts use the Russell 2000 to garner a more national view of US economic health rather than using the S&P 500 where many are global companies that have revenue streams from overseas.

The average value of a company listed on the Russell 2000 is $4.82 billion, and the median is $960 million, paling in comparison to the large or even mega caps found in the ranks at Berkshire or the S&P 500.

On the other hand, the S&P 500 is no small player. As the largest ETF globally, SPY boasts over $500 billion in assets and mirrors the S&P 500 Index. It offers investors instant diversification across industry sectors while maintaining lower expense ratios than those found in actively managed funds. With an expense ratio of around 0.095% and high liquidity, SPY is a favourite for investors who favour the ease of trading and is used by options and futures traders.

It’s worth noting the market capitalisation of both entities: Berkshire Hathaway stands tall with a market cap of $870 billion, overshadowing SPY’s $507 billion and leaving Russell 2000’s $57.10 billion in the dust. However, despite their size disparity, each offers distinct advantages.

Berkshire Hathaway does not distribute dividends, which could be a downside for those seeking regular income streams from their investments. Conversely, SPY provides potential dividend income, on top of the capital gains it might realise.

When considering valuations, the difference becomes clearer. Berkshire Hathaway’s stock trades at a P/E ratio of 11.96, suggesting a potentially undervalued status compared to SPY, with a P/E ratio of 25.99. Russell 2000 has a P/E ratio of 12.96 which is comparable to Berkshire Hathaway. It is worth considering however that due to the types of companies that Berkshire usually invest in (blue chips) often being dividend payers themselves, and not so open to growth type valuations, there is an element of greater stability than you might find within other more aggressive funds.

So far in 2024, the S&P 500 has added 9.2%, while the Russell 2000 has shown just 1.84%. Berkshire Hathaway on the other hand leads in this regard, sitting up 11.52%. Whichever data you look at can skew the picture slightly, so it is always worth taking a look under the hood at the key components of any fund, or index you are considering. It is easy enough to take a glance at the leading companies on the SPY, the Russell, or even those at BH to ensure they align with your own preferences.

While SPY offers ease of trade, liquidity, and a representation of the broader market, Berkshire Hathaway’s robust history of outperformance and lower valuation ratios make it a compelling option. The Russell 2000 allows investors to speculate on the US market, without being skewed so much towards a particular industry.

Whether one favours the investment strategies of Warren Buffett or the broad exposure of an S&P 500 ETF, or the more streamlined US companies on the Russell 2000, all three companies represent significant pillars in the world of investment, each with its own merit.