Can ETFs Alone Make You Retire a Millionaire?

A million bucks isn't quite the wealth milestone it used to be. Still, a seven-figure stash is nothing to sneeze at. For investors starting from scratch, stock-picking your way to a million-dollar nest egg is an impressive feat. It's also a lot of work though, and requires a whole lot of time dedicated to being a student of the market. Not everyone who's even able to put in the necessary time and effort is necessarily interested in doing so.

The good news is, there's an easier way to become a self-made millionaire than by keeping constant tabs on your portfolio. Exchange-traded funds, or ETFs, can do the job just as well as individual stocks, if not better.

Plenty of firepower

Plenty of people will argue that premise -- and understandably so. Most members of the financial media machine cover the news in such a way that suggests investors should be frequent buyers and sellers of stocks. Telling people they should buy and hold index funds for years on end, conversely, doesn't draw an audience or entice advertisers that ultimately fund the investment media business.

Don't be misled, though. An exchange-traded fund as simple as the SPDR S&P 500 ETF Trust (SPY 1.08%) -- an investment in the broad market itself -- can do the trick. Given its average annual return of 9% per year, a $5,000 annual investment made in the index fund annually for 33 consecutive years will leave you with $1 million at the end. While coming up with an extra $5,000 to tuck away may be tough for some people, it's a worthwhile goal for any investors able to stretch their budgets.

The S&P 500 (^GSPC 1.14%) isn't the only index to invest in, of course, nor should it be the only one you consider. If you're a true long-term investor and can stomach a little extra volatility, the iShares Core S&P Mid-Cap ETF (IJH 0.48%) offers exposure to the S&P 400 Mid Cap Index. Its average annual return over the past 30 years is a beefier 10%. It would take you only 31 years investing (and then reinvesting your gains in more of the same fund) $5,000 per year at that pace to reach this million-dollar mark.

And that's still not your only good ETF option. An even-more-volatile Technology Select Sector SPDR Fund (XLK 1.27%) also dishes out even more gains, given enough time. Its average yearly return going back the past 20 years is an incredible 12%. At that clip, it would only take you 28 years to turn an annual $5,000 investment in the exchange-traded fund into $1 million.

Of course, you're not required to limit yourself to just one ETF. A mix of all three of these options or other combinations of ETFs are all more than capable of growing into a million bucks, in time. In fact, such a portfolio may be a far better option than one that's fully diversified with bunches of different stocks ... although not for the reason you might expect.

The right mindset is half the battle

There are obvious differences between individual stocks and exchange-traded funds. The best of these differences, however, is one that's not so obvious. That's the investor mindset behind choosing funds over stocks.

As noted, the financial news industry often encourages investors to try to time their stock picks. People are prompted to scoop up stocks while they're seemingly underpriced. Likewise, they're compelled to sell stocks that appear to have climbed too far, too fast. 

The problem is, neither the media nor investors are particularly great at timing the market. This sort of activity often ends up costing you more than it helps, when investors aren't truly committed to long-term positions that are held for far longer than any near-term, volatility-driven stock swings may last.

The underlying thinking behind ownership of most exchange-traded funds, however, sidesteps the risk of mistimed stock trades. Most investors buy ETFs with a true long-term mindset, planning on owning them through the good times and bad, playing into their strength. With such a plan in place before trouble starts, it's much easier to stick with these positions even when other investors are dumping their stocks. This of course means you're fully invested in the market right at its turning points, participating in all of its bullish potential. With good reason to expect sizable gains just given enough time in the market, those with this long-term focus don't have to sweat any of the market's short-term gyrations.

And that's a very big deal. The path to millionaire status not only encourages you to invest in the stock market but also greatly rewards the people that can simply leave their portfolio alone and let time do the bulk of the heavy lifting. ETFs are one of the easiest ways to make sure you're doing that.