In 2008, Warren Buffett famously challenged New York-based Protégé Partners that the S&P 500 Index would outperform a sample of hedge funds over a 10-year period. The terms of the wager required Warren Buffett to select an index tracker, or exchange traded fund (ETF), which would follow the S&P 500 Index. Protégé Partners would hand pick five hedge funds it believed would outperform the index. The victor at the end of the 10 years would receive US$1,000,000 towards a charity of their choice.
2016 marks the eighth year of the 10-year wager and the statistics so far are telling. Despite giving up some ground in 2015, Warren Buffett's chosen fund – the Vanguard 500 Index Fund Admiral Shares – is up a massive 65.67% since 2008. Protégé's five chosen hedge funds are up 21.87% (on average) over the same period implying Buffett is in an unbeatable position with two years to run.
The moral of the story is that stock picking doesn't always yield the best results, thus the wiser investment often might be to just track the market. This brings me to the iShares S&P/ASX Top 20 Index ETF (ASX: ILC).
What is it?
The iShares S&P/ASX Top 20 Index ETF ("iShares ETF") is a fund which tracks the performance of the 20 shares in the S&P/ASX Top 20 Index (ASX: XTL). The iShares ETF is managed by BlackRock, the world's largest money manager, and comprises 20 of Australia's largest listed securities, such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and BHP Billiton Limited (ASX: BHP).
Who is BlackRock?
Buffett's preferred money manager is Vanguard, given it generally has lower management costs in its ETFs. Nonetheless, BlackRock carries its own weight in funds management, boasting over $4.5 trillion in assets under management.
BlackRock's assets under management dwarfs The Vanguard Group's assets under management by almost 50% (as of 2015), even though Vanguard is the second-largest money manager in the world. Accordingly, it appears that your money is safe with BlackRock.
What are its fees?
Like other ETFs, such as Vanguard's Australian Share ETF (ASX: VAS) which you can read about here. The aim of the iShares ETF is to simply track the Top 20 Index. BlackRock takes a small management fee of 0.24% per annum to ensure appropriate allocation of stocks.
Whilst some may perceive this to be leakage of performance, as Buffett's bet shows, these fees are more than compensated in the long-run through the the general performance of the index.
Foolish takeaway
Whilst Warren Buffett's $1,000,000 bet is assumedly chump change for the Oracle from Omaha, it is telling that a man with such investing discipline is willing to wager on something that is out of his control. Therefore, when the world's greatest investor puts his own money on the line, it would be wise to listen.
Although there are many different ETFs available on the market, I believe the recent underperformance of Australia's Top 20 shares (relative to the broader market) makes the iShares ETF compelling value at current prices.
