Investing in the stock market can be daunting, but with the right strategy, it can also be lucrative.
You don't need to be a stock market guru or spend countless hours researching companies to make a lot of money investing, either. While there's no single correct way to invest, there's one type of investment that can help you (safely) build wealth with very little effort: The S&P 500 ETF.
What is an S&P 500 ETF?
An S&P 500 ETF (exchange-traded fund) is an investment that tracks the S&P 500 index. In other words, it includes the same stocks as the index itself, and it aims to mirror its performance over time.
The S&P 500 itself includes stocks from 500 of the largest and strongest companies in the U.S., ranging from tech giants like Apple and Amazon to household brands such as Procter & Gamble and Coca-Cola. When you invest in just one S&P 500 ETF, you'll own a stake in all 500 of these companies.
There are many advantages to this type of investment, but a few of the most important include:
- Instant diversification: With an S&P 500 ETF, you're not only investing in hundreds of stocks at once, but those companies are also from a wide variety of industries. This provides plenty of diversification, which can limit your risk.
- A long track record of success: The S&P 500 itself has a decades-long history of recovering from market crashes, recessions, and other downturns. While there are never any guarantees when investing, an S&P 500 ETF is about as close as you can get to guaranteed positive average returns over the long haul.
- More protection against volatility: No investment is immune to short-term volatility. Although this ETF will still take a hit during market slumps, it often doesn't experience extreme ups and downs like many other investments.
One of the best perks about this investment, though, is that it's almost entirely passive. You don't need to research companies, as all of the stocks are already chosen for you. Because it's a long-term investment, you also don't have to worry about when to buy or sell. Just invest as much as you can afford each month, then hold your investment for as long as possible.
How much can you earn with this ETF?
Of course, exactly how much you'll earn with any investment will depend on how the market fares over the coming years and decades. However, it's possible to get a rough estimate of how your investment will grow over time.
Historically, the market itself has earned an average annual return of around 10% per year, meaning the annual highs and lows have averaged out to roughly 10% per year over several decades.
If you're investing, say, $200 per month in an S&P 500 ETF while earning a 10% average annual return, here's approximately how much you could accumulate over time:
| Number of Years | Total Savings |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: Author's calculations via Investor.gov
Again, the S&P 500 ETF is a passive investment, so it requires next to no effort on your end other than investing consistently. By contributing even a couple hundred dollars per month, you could build a portfolio worth hundreds of thousands of dollars or more over time.
The best S&P 500 ETFs to buy right now
There are many different S&P 500 ETFs to choose from. A few of the most popular include the Vanguard S&P 500 ETF (VOO 1.00%), the SPDR S&P 500 ETF Trust (SPY 0.95%), and the iShares Core S&P 500 ETF (IVV 0.98%).
The SPDR S&P 500 ETF holds the title of the very first ETF launched in the U.S., dating back to 1993. It's also the largest ETF by assets managed, making it a popular choice among investors.
One major advantage that the Vanguard and iShares funds share, though, is low fees. Both ETFs have an expense ratio of just 0.03% per year, compared to SPDR's 0.0945% per year. While this difference may not seem like much, it could add up to tens of thousands of dollars in fees over time.
There's not necessarily a right or wrong choice here. S&P 500 ETFs track the same index and will see roughly the same returns over time. But it's important to know the advantages and disadvantages of any fund you're considering buying.
The S&P 500 ETF is one of the safest and most reliable funds out there, and it has a long track record of consistent growth over time. If you're looking for a hands-off investment that can help you generate wealth over the long haul, the S&P 500 ETF could be a good fit for your portfolio.
