I've believed for a long time that investing in Warren Buffett's favorite stock was similar to investing in an exchange-traded fund (ETF). Buffett's favorite stock, of course, is Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the company he has led for decades.

Berkshire Hathaway isn't quite as diversified as an S&P 500 ETF, but it's not too far behind. The conglomerate owns over 60 subsidiaries and has stakes in over 40 other publicly traded companies.

I'm convinced that buying Berkshire Hathaway stock is smarter than investing in an S&P 500 ETF. Here are three reasons why.

1. Better performance track record

Berkshire Hathaway indisputably has a better performance track record than S&P 500 ETFs. Its year-to-date gain in 2024 is nearly double that of the two most heavily traded S&P 500 ETFs, the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and Vanguard S&P 500 ETF.

More importantly, though, Berkshire has handily beaten the S&P 500 over the long term. Between 1965 (when Buffett gained control of the company) and 2023, Berkshire's compounded average annual return was 19.8% compared to only 10.2% for the S&P 500. Its overall gain was over 140 times greater than the S&P 500's.

Granted, past performance is no guarantee of future returns. However, I suspect Berkshire will continue outgaining S&P 500 ETFs over the long run because of Buffett's process for selecting stocks and acquiring businesses. He only invests when he can comfortably predict future earnings and when the current valuation is attractive relative to those future earnings.

Buffett won't be around forever. It's possible that his successors could adopt different investing philosophies. I don't think that will happen, though, at least not to a great extent. Berkshire Hathaway shareholders will want continuity with the successful past that Buffett established -- and I expect they'll get it.

2. Lower volatility

Often when individual stocks outperform the market those greater gains come with the major downside of higher volatility. However, that's not the case with Berkshire Hathaway. The stock's beta coefficient (a key measure of volatility) over the last five years is 0.87. Any value below 1.0 reflects lower volatility than the overall market.

Berkshire's history of lower volatility goes back far beyond only five years, though. For example, in the market meltdown during the financial crisis of 2008, the stock plunged like most others. But the SPDR S&P 500 ETF Trust fell even more.

It was a similar story during the major market sell-off in early 2020 resulting from the COVID-19 pandemic. While Berkshire's shares tanked, they weren't hit as hard as the SPDR S&P 500 ETF Trust.

Sure, it took Berkshire a few months longer to rebound. However, investors' maximum drawdown was still greater with S&P 500 ETFs than it was with Buffett's favorite stock.

I suspect that one key reason Berkshire isn't as volatile as S&P 500 ETFs is that Buffett always keeps plenty of cash in reserve while the ETFs are always fully invested in stocks. As of the end of the second quarter of 2024, Berkshire's cash, cash equivalents, and short-term investments totaled nearly $277 billion. That's a huge cash stockpile Buffett can put to work if the stock market sinks and causes valuations to be more attractive.

3. No expense fees

One of the advantages of S&P 500 ETFs is that their annual expense fees are low. The SPDR S&P 500 ETF Trust's annual expense ratio is 0.0945%, with the Vanguard S&P 500 ETF's ratio even lower at 0.03%.

But there are no expense fees at all associated with investing in Berkshire Hathaway stock. Over a long enough time, even small percentages can add up to a significant amount of money. With no expense fees, a stellar performance track record, low volatility, and significant diversification, I think investing in Berkshire Hathaway stock truly is smarter than buying an S&P 500 ETF.

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Keith Speights has positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

3 Reasons Buying Warren Buffett's Favorite Stock Is Smarter Than Investing in an S&P 500 ETF was originally published by The Motley Fool