When you buy an exchange-traded fund, or ETF, your money is spread around many different investments. The actual investments depend on the purpose of the fund. Many ETFs track financial indexes such as the S&P 500. Others are designed to give you exposure to specific niches such as cannabis companies, or small companies, or healthcare companies.
ETFs help make investing easy. You can screen exchange-traded funds through your brokerage firm and buy with one click, typically without paying commission. They trade like stocks, and some brokerages allow you to buy fractional shares of them. Many also have low expense ratios. Since you gain exposure to all of the different investments the ETF owns, you also get diversification without much effort.
The big question, though, is whether you can actually become a millionaire by retirement just by investing in ETFs.
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You can become a millionaire with ETFs if you invest enough money
The reality is, it is absolutely possible to become a millionaire by buying exchange-traded funds alone -- but you need to invest enough money in them to make that happen.
Since ETFs spread your money around and buy you an ownership interest in many different companies, the potential returns your investment can earn are more limited than if you bought individual stocks. You're unlikely to earn huge returns quickly because too many of the different companies the ETF owns would have to perform extremely well for that to happen. You could easily have one or two stocks that outperform and allow you to make 20% or 30% or more on your money over the course of a few years, but that's not likely with an ETF.
The good news is, your risk is also more limited. But, because you're limiting potential returns, becoming a millionaire retiree with ETFs alone is going to be a slow and steady process. And you'll need to be sure you're investing enough to make that happen. For example, if you invested in an S&P 500 fund (which is a fund that tracks the performance of around 500 huge U.S. companies) you could expect to earn average annual returns of around 10% based on historical performance of this financial index.
So, if you started investing at the age of 30, you hoped to have $1 million by age 65, and you earned a 10% average annual return over those 35 years of investing, you would need to put away around $506 per month every month. This is doable, but if you don't do it, then you may fall short of your goal. If you start later, you'll have to invest more.
Are ETFs the best approach for you?
As you can see, it's possible to become a millionaire with ETFs alone. In fact, because exchange-traded funds limit your risk, if you invest in a fund that tracks a market index and you put enough money in, it's probable that you will achieve millionaire status. This can be one of the easiest, safest ways to amass a seven-figure nest egg.
The big downside, though, is that you are limiting your potential return on investment by choosing ETFs alone. If you like picking stocks, are good at it, and are willing to put in the time to develop a solid investment strategy, you may prefer to take on more risk in exchange for the chance of earning higher returns and achieving millionaire status more quickly than with a portfolio made up entirely of ETFs.
It's up to you what strategy you embrace, but no matter what you do, be sure to understand potential risk and rewards and start investing early so you can keep your required monthly contribution to a reasonable level.
