For many investors, exchange-traded funds (ETFs) should be what they look into when deciding where to invest. Instead of having to research various industries and individual companies, ETFs allow investors to gain exposure to multiple assets with a single investment. Whether you prefer companies in a certain sector, a particular size, or a mission you align with, there's an ETF for you.
The best part? With time and persistence, ETFs alone can ensure you retire a millionaire.
Image source: Getty Images.
The power of compounding
Financially, compounding can either be one of your worst enemies or one of your best friends. If you have debt, compounding can take it from seemingly manageable to "Uh oh, now what?" But, in investing, compounding is a wonderful phenomenon responsible for a lot of wealth creation. Compounding occurs when the return you earn on your investments begins to earn a return on itself, and it can easily make you a millionaire when used the right way.
Let's take the S&P 500, which tracks the largest 500 U.S. companies by market cap, for example. Historically, the S&P 500 returns 10% annually in the long term. Some years, it may return less; some years, it may return more; but generally speaking, you can count on roughly 10% yearly returns in the long run. If you were to solely invest in an S&P 500 fund -- such as the Vanguard S&P 500 ETF (VOO 0.15%) -- here's how long it would take you to reach $1 million at various monthly contributions:
| Monthly Contributions | Annual Return | Expense Ratio | Years Until $1 Million |
|---|---|---|---|
| $500 | 10% | 0.03% | 31 |
| $1,000 | 10% | 0.03% | 24 |
| $1,500 | 10% | 0.03% | 20 |
Data source: Author calculations.
Assuming you plan to retire at 67 -- which is the full retirement age for people born in 1960 or later, according to Social Security -- you could retire a millionaire just by making regular monthly contributions to the Vanguard S&P 500 ETF beginning at age 36, 43, or 47, respectively.
Dividends can speed up the process
The above example is solely based on the ETF's stock price increase, but if you add in a dividend yield, the time it takes to accumulate at least $1 million decreases. The Vanguard High Dividend Yield ETF (VYM 0.26%) has a 2.75% dividend yield. If you made the same monthly contributions, but added in the dividend yield, here's how long it would take you to reach at least $1 million:
| Monthly Contributions | Annual Return | Expense Ratio | Dividend Yield | Years Until $1 Million |
|---|---|---|---|---|
| $500 | 10% | 0.06% | 2.75% | 26 |
| $1,000 | 10% | 0.06% | 2.75% | 21 |
| $1,500 | 10% | 0.06% | 2.75% | 18 |
Data source: Author calculations.
Even in this scenario, a dividend yield of a couple of percentages can cut years off the total time it takes to accumulate $1 million.
Let time work its magic
For most people, becoming a millionaire solely off ETFs (or any investment) largely comes down to one thing: Time. The earlier you begin investing, the better. With consistency and utilizing investing strategies like dollar-cost averaging, many people will find they can achieve millionaire status without needing an extraordinary lump sum of money to begin with. With years of consistency, you can find yourself in a position to live the retirement life that you envision.
