Using exchange-traded funds (ETFs) is a way you can get started with investing. They're simple, easy to understand, and very accessible, which makes buying them easy.
But are they too good to be true? And do you need more than this simple investment in your portfolio if you want your accounts to grow to $1 million?
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The benefits of exchange-traded funds
ETFs can make investing more affordable. If you wanted to buy an ounce of gold, you could do so for about $1,800. Or you could buy a share of SPDR Gold Trust for $170, corresponding to roughly 0.0936 ounces of gold.
Buying just one share of Amazon, which is one of the companies included in the S&P 500, would cost you $3,380. But you can buy one share of SPDR S&P 500 ETF Trust (SPY 0.13%), which tracks the whole index, for around $440. This affordability also provides you with more diversification than if you were building a portfolio of individual stocks.
How much your money could grow
Accumulating $1 million from investing in ETFs is possible. But whether or not you could become a millionaire investing in ETFs depends on a number of factors like the average rate of return you would receive and the amount of money you were investing. Here's how much you would've needed to put into these popular ETFs annually for your account to grow to $1 million in 30 years.
| ETF | Average Rate of Return (Since Inception) | Annual Amount Needed | Final Amount in 30 Years |
|---|---|---|---|
|
Invesco QQQ Trust |
9.76% | $5,800 | $1,000,744 |
|
SPDR S&P 500 |
10.38% | $5,250 | $1,024,521 |
|
iShares Russell 2000 ETF |
9.17% | $6,600 | $1,013,815 |
Data source: Fidelity. Some calculations by author via CalcXML.
How ETFs could help you meet your goals better than mutual funds
A mutual fund lets you buy or sell it once a day after the stock market has finished trading. All of the close prices for the individual stocks inside of it are calculated and then the price of the mutual fund is determined from that. This means that if you place an order for a mutual fund at noon, you won't know what price you're getting it at. Instead, you'll designate a certain dollar amount you intend on spending and the number of shares you get will depend on the closing price.
An ETF trades more like a stock. The price of it changes by the second and when you buy it, the trade executes immediately so you know exactly the price that you're buying it at. This allows for more flexibility with trading and makes it so that you can buy as little as one share. Many brokerage firms will even let you buy a fraction of a share now, whereas a mutual fund may have a minimum investment amount. This flexibility could make saving and investing more attainable for you if you don't have much to start with.
Risk versus reward
If you buy an ETF like SPDR S&P 500, you're 100% invested in stocks. This higher level of risk should result in a higher rate of return on average and greater growth during good years for the stock market. But in exchange for this, you could also experience bigger losses during a stock market crash or bear market.
In a year like 2008, you would've lost 37% of your wealth if you only held SPY, and if seeing your accounts go from $100,000 to $63,000 makes you nervous, investing in only this ETF may not be a suitable move for you. But you can also buy bond fund ETFs, and adding something like Vanguard Total Bond Market ETF could help limit losses. But you will also be lowering your average rate of return and lowering your return potential during good years.
ETFs have many benefits and are extremely simple to use. And it's very possible to become a millionaire using only this vehicle. But just like with any other investment, it won't happen overnight; it will require time, patience, and consistency.
