The Vanguard S&P 500 ETF Could Turn $200 per Month Into Over $1 Million. Here's How.
Key Points
S&P 500 ETFs are known for their consistency, especially over the long term.
With enough time, even relatively small contributions can add up.
If you're looking to maximize your earnings in the stock market, there may be an even stronger option.
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The Vanguard S&P 500 ETF (NYSEMKT: VOO) recently reached a major milestone, becoming the first ETF in history to surpass $1 trillion in assets.
There are plenty of reasons why this ETF is the most popular among investors. It offers broad diversification across 500 large U.S. companies, and the S&P 500 (SNPINDEX: ^GSPC) itself has a decades-long track record of surviving market volatility. It even comes highly recommended by Warren Buffett, who has called the S&P 500 fund "the best thing" for most investors.
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While this investment is known for its consistency and stability, it can also be a powerful wealth-building machine. With enough time, it could even turn $200 per month into more than $1 million. Here's how.
Image source: Getty Images.
Time is your most powerful resource
The Vanguard S&P 500 ETF may not be the highest-earning investment, but with enough time, even average returns can add up.
It will be critical, however, to stay in the market for the long haul. It can be tempting to avoid investing during the next downturn, whenever it may arrive, but investing consistently for decades is key to building wealth with an S&P 500 ETF.
Historically, the S&P 500 itself has earned an average rate of return of around 10% per year. This means that over many decades, the index's highs and lows have averaged out to around 10% annually.
If you're investing $200 per month while earning a 10% average annual return, here's approximately how much you could accumulate over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: author's calculations via investor.gov.
At a 10% average annual return, it would take roughly four decades to build a portfolio worth $1 million while investing $200 per month. If this ETF earns higher returns going forward or if you can afford to increase your monthly contributions, you could reach that goal sooner.
How to earn even more in the stock market
By definition, an S&P 500 ETF cannot earn above-average returns, since it's designed to track the market itself. For investors looking to beat the market, a more niche ETF -- like a growth ETF or tech ETF -- could be a better choice.
The Vanguard Growth ETF (NYSEMKT: VUG) and the Vanguard Information Technology ETF (NYSEMKT: VGT), for example, have earned average annual returns of 12% and 15%, respectively, since their launch in 2004. At those rates, they could significantly outperform the S&P 500 over time, assuming you're still investing $200 per month.
| Number of Years | Total Portfolio Value: 10% Avg. Annual Return | Total Portfolio Value: 12% Avg. Annual Return | Total Portfolio Value: 15% Avg. Annual Return |
|---|---|---|---|
| 20 | $137,000 | $173,000 | $246,000 |
| 25 | $236,000 | $320,000 | $511,000 |
| 30 | $395,000 | $579,000 | $1,043,000 |
Data source: Author's calculations via investor.gov.
The downside to these ETFs, however, is increased volatility. These funds are less predictable over time than the S&P 500 ETF, as they don't have the same track record as the benchmark index. They also may experience more severe ups and downs in the short term.
There's no right or wrong approach here, as your choice will depend on your goals and risk tolerance. The Vanguard S&P 500 ETF offers diversification and consistency, and for many investors, that's ideal. Those seeking to maximize their earnings, however, may opt for a slightly more aggressive approach.
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Katie Brockman has positions in Vanguard Growth ETF, Vanguard Information Technology ETF, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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