Filing your taxes may be a headache, but for a lot of taxpayers it results in a substantial windfall. The average tax refund was $3,061 for the week that ended March 5, according to the IRS.
Investing that money is a great strategy if you don't have high-interest debt, you have an emergency fund, and you aren't struggling to pay bills. Exchange-traded funds (ETFs) are a good bet because they spread out your investment over hundreds or thousands of stocks.
Here are three ETFs that would have tripled your money in the past decade. That's no guarantee that they'll triple your money in the decade to come, but as long as you're committed to investing for the long term, all three funds are worthy picks.
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1. iShares Russell 2000 ETF
Small-cap stocks tend to outperform large-cap stocks in the long run. The risk is greater, but you have the potential to invest in the next Netflix (NFLX 9.72%) or Amazon (AMZN +0.26%) while it's still young. The iShares Russell 2000 ETF (IWM +2.16%) makes you an investor in all 2,000 stocks in the Russell 2000 index.
The index represents the 1,001st to 3,000th U.S. stocks by market cap, as measured on the final trading day in June. Its current holdings have market caps ranging from $200 million to $32 billion. It has an expense ratio of 0.1%, which means that 99.9% of your money is going toward your actual investment instead of fees.
The fund's five largest holdings by market cap are casino and racetrack operator Penn National Gaming (PENN 1.80%), fuel cell company Plug Power (PLUG 2.80%), hotel and casino operator Caesars Entertainment (CZR 1.66%), video game retailer and notorious short-squeeze target GameStop (GME 2.50%), and agri-food manufacturer Darling Ingredients (DAR 4.06%).
Had you invested $3,061 in the iShares Russell 2000 ETF in March 2011, you'd have a little over $10,200 today. That's slightly less than the $11,300 or so you'd have if you'd invested in a low-cost S&P 500 index fund, but in the past 20 years, the Russell 2000 index has outperformed the S&P 500 index, which tracks the stocks of 500 of the largest corporations in the U.S.
2. Invesco QQQ ETF
The Invesco QQQ ETF (QQQ +1.31%) is a favorite ETF of growth investors. It tracks the Nasdaq 100 index, which measures the performance of the 100 largest non-financial stocks on the tech-heavy Nasdaq Composite Index. Tech stocks account for about 48% of the funds holdings, the top five of which are Apple (AAPL +2.65%), Microsoft (MSFT +0.60%), Amazon (AMZN +0.26%), Tesla (TSLA +3.01%), and Facebook (FB +1.81%).
A $3,061 investment in Invesco QQQ back in March 2011 would have soared to more than $19,000 today. The fund has a relatively low expense ratio of 0.2%.
An important caveat: Had you invested in Invesco QQQ in 2011, you would have invested when tech stocks were having a terrible year. They went on to surge over the next decade, particularly in 2020, but they've been cooling off over the last couple months.
The fund still has serious growth potential. But it's only appropriate if you're OK with a high level of risk, particularly in the short term. Don't buy with the expectation that you'll see your money grow sixfold in the decade ahead.
3. Vanguard S&P 500 Index ETF
If you're looking for a reliable way to grow that tax refund, the Vanguard S&P 500 Index ETF (VOO +1.23%) is tough to beat.
The Vanguard S&P 500 ETF is one of the cheapest S&P 500 index funds available, with a 0.03% expense ratio. You get an automatically diversified portfolio that's invested across 500 large-cap U.S. stocks and all 11 stock market sectors. Its largest five holdings are Apple, Amazon, Microsoft, Google parent company Alphabet (GOOG +1.99%) (GOOGL +1.71%), and Facebook. If you made a $3,061 investment 10 years ago in the fund, you'd have over $11,000 today.
Some years the S&P 500 will be down, but never once in history has it delivered losses over a 20-year holding period. In a given year, you have about a 73% chance of making money. If you don't need your tax refund money in the next few years, investing it in a low-cost S&P 500 index fund like Vanguard S&P 500 ETF is about the closest you can get to guaranteed returns.
