In real life, there's no such thing as an easy button. Such a contraption (at least, one that works) only exists in TV commercials.
However, there are relatively easy ways to make money over the long term. Exchange-traded funds (ETFs) provide investors with a convenient way to buy a large basket of stocks. Some ETFs offer especially good growth prospects. Here are two ETFs that could realistically turn $100 per month into $2.2 million with little effort required.
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A couple of similar ETFs
I won't beat around the bush. The two ETFs I have in mind are the iShares Morningstar Small-Cap Value ETF (ISCV 0.49%) and the Vanguard Small-Cap Value Index Fund ETF (VBR 0.37%).
As their names indicate, both of these funds own small-cap value stocks. One key difference between these similar ETFs is how they determine which stocks to include. The iShares ETF attempts to track the Morningstar US Small Cap Broad Value Extended Index, which includes stocks that fall between the 90th and 99.5th percentile of the market caps of the broader U.S. stock market. The Vanguard ETF attempts to track the CRSP US Small Cap Value Index, which includes stocks covering 85% to 98% of the market caps of the broader U.S. stock market.
The iShares ETF owns 1,123 stocks with an average price-to-earnings (P/E) ratio of 10.19. The Vanguard ETF owns 856 stocks with an average P/E multiple of 12.6.
Another minor difference between the two funds is their costs. The annual expense ratio of the iShares ETF is 0.06%, slightly lower than the 0.06% expense ratio of the Vanguard ETF.
How these ETFs could turn $100 per month into $2.2 million
Small-cap value stocks haven't performed as well as large-cap stocks in recent years. But it's a much different story over the long term.
Between July 1926 and May 2023, small-cap value stocks delivered an average annual return of 14.1% compared to 10% for the broader market. The returns for small-cap value stocks have been a little higher since May 2023, but I'll use the historical average in my calculations.
Let's make three assumptions:
- A person began investing $100 each month at age 25 in an ETF holding small-cap value stocks.
- The person continued to invest this same amount each month for 40 years.
- The rate of return achieved is the same as the 14.1% historical average annual return for small-cap value stocks minus an expense ratio of 0.07% (the higher of the two ETFs mentioned).
This is without question an easy approach. It would take at most a few minutes each month to invest in the small-cap value ETF.
At age 65, the individual's investment portfolio would be worth over $2.2 million. Investing the $100 at the beginning of each month would boost the total a little compared to investing at the end of each month, but either approach would end up in the same ballpark.
The power of compounding is especially evident during the latter part of the 40 years of investing. After a little over 34 years, the portfolio would reach $1 million. Over the next nearly six years, though, it would more than double.
A few caveats
Now for a few caveats. First, the calculations above didn't include the effect of taxes. However, investing in a Roth IRA or a Roth 401(k) would allow the $100 each month to grow tax-free.
Second, this approach wouldn't have worked over the last 40 years. Why? Neither the iShares Morningstar Small-Cap Value ETF nor the Vanguard Small-Cap Value Index Fund ETF have been around that long. Both funds were created in 2004.
Third (and most importantly), there's no guarantee that these two ETFs or small-cap value stocks as a whole will achieve the level of returns seen in the past. As most investors have heard plenty of times, past performance is not necessarily indicative of future results.
That said, I do expect small-cap value stocks to perform well over the coming decades for the same reasons they've done so historically. The iShares Morningstar Small-Cap Value ETF and the Vanguard Small-Cap Value Index Fund ETF provide great ways to invest in small-cap value stocks.
