Making money in the stock market doesn't have to be complicated; the biggest obstacles to earning a great return often involve investors themselves. Getting caught up in the latest meme hype, taking on too much risk, or simply lacking patience are some of the biggest reasons investors don't achieve strong returns. Even if you aren't sure of what to invest in, there are exchange-traded funds (ETFs) that can help diversify your investment and keep your risk low.
A good example of that is the Health Care Select Sector SPDR Fund (XLV -0.67%), which holds some of the top healthcare companies in the world, including Johnson & Johnson, UnitedHealth Group, and Pfizer. It has outperformed the market over the past decade, and I'll show you how investing $39,000 into the fund could potentially make you a millionaire.
The ETF has averaged returns of 14%
In the past 10 years, the Health Care Select Sector SPDR ETF has generated total returns (which include dividends) of 260% -- that's higher than the S&P 500, which has amassed returns of 224% during that time frame. That averages out to a compound annual growth rate of just under 14%.
And those returns factor in the recent bear market. It might not be unreasonable to expect that the fund can continue delivering those types of returns in the future, as healthcare is one of the safer places to invest in; consumers will always need healthcare. Plus, with an aging demographic in the U.S., demand for healthcare services could soar even higher in the years ahead, meaning the ETF's returns may be even better in the future than they have been in the past.
Getting to $1 million
An investment that grows by roughly 14% per year would take less than six years to double in value. And if the Health Care Select Sector SPDR Fund were to maintain those types of returns over the long term, then investing $39,000 into the ETF could get you to $1 million after 25 years. The chart below shows you the progression of that investment over time:
Chart by author.
The actual returns can, and very likely will, vary. You can also accelerate these returns by investing more money over the years. However, in this example, you only need to invest a lump sum at the beginning and simply let your investment grow over time. But by remaining invested in the fund, you can take the risk out of picking individual stocks while potentially earning some impressive returns along the way.
Why ETFs make sense for most investors
By investing in ETFs, you can obtain much better diversification than if you were to buy stocks yourself. An ETF gives you an easy place to focus the bulk of your investment money on. You can still pick individual stocks, but a fund such as XLV can be a pillar for your portfolio that plays a key part in its long-term growth.
Rather than having to select which stock to invest in at a certain point in time and analyzing ratios and earnings reports, you can just put whatever money you have available to invest into the fund. The Health Care Select Sector SPDR Fund has a modest expense ratio of 0.1%, meaning you aren't incurring significant fees for putting your money into the ETF.
If you're a long-term investor who wants to minimize risk or you just want a simple way to invest in the stock market, the Health Care Select Sector SPDR Fund can be a great option.
