Index funds lack the excitement of individual stocks. But a boring investment strategy is not necessarily a bad investment strategy. In fact, the opposite is often true. Investors who treat their portfolios as entertainment can easily wind up in the red. Moreover, outperforming the major stock market indexes over an extended period is hard. Even professionals struggle to overcome those odds.
Indeed, Warren Buffett once wrote, "By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals."
Now is a good time to put money into the stock market. The S&P 500 reached a record high in January for the first time in two years. That means stocks are officially in a bull market, a threshold that generally portends substantial price appreciation over a sustained period.
Here's how a Nasdaq Composite index fund could turn $300 per month into $862,800 over three decades.
The Fidelity Nasdaq Composite ETF offers exposure to many innovative technology companies
The Fidelity Nasdaq Composite ETF (ONEQ +0.07%) is a growth-focused index fund. It spreads capital across more than 1,000 stocks that span all 11 market sectors, but it skews heavily toward the information technology (48%), communications services (15%), and consumer discretionary (14%) sectors. Investors can think of the index fund as a readymade portfolio offering diversified exposure to many of the most innovative companies on the planet, including the "Magnificent Seven."
NASDAQ: ONEQ
Key Data Points
The 10 largest holdings in the Fidelity Nasdaq Composite ETF are listed below:
- Microsoft: 12.1%
- Apple: 11.7%
- Alphabet: 6.7%
- Amazon: 6.5%
- Nvidia: 6.2%
- Meta Platforms: 3.5%
- Tesla: 2.4%
- Broadcom: 2.3%
- Costco Wholesale: 1.2%
- Adobe: 1.2%
Every company listed above could create value for shareholders in the future. Microsoft, Alphabet, and Amazon are the largest cloud services providers, so they should benefit as complex workloads like artificial intelligence and analytics drive demand for cloud infrastructure. Apple is the second-largest smartphone manufacturer in the world, and its services business is expanding due to strength in mobile applications, financial services, and digital advertising.
Nvidia graphics processing units are the gold standard in accelerating data center workloads like machine learning, and the company has expanded its data center portfolio to include networking equipment, central processing units, and software purpose-built for artificial intelligence. Meta Platforms owns several of the most popular social media properties and it ranks as the second largest digital advertising company in the world. Tesla is the market leader in battery electric vehicles and some analysts see substantial upside in its autonomous driving ambitions.
Finally, Broadcom is the leader in application-specific integrated circuits, chips designed for narrow use cases like artificial intelligence. Costco is the third largest retailer worldwide, and it benefits from immense consumer loyalty, as evidenced by its 93% membership renewal rate. And Adobe is the industry standard in certain creativity software verticals with products like Photoshop and Illustrator, as well as a leader in multichannel marketing platforms.
Those 10 companies account for about 53% of the Fidelity Nasdaq Composite ETF in terms of asset allocation, so the competitive strengths I've just discussed are particularly consequential. However, should a few of those stocks perform poorly, none of the positions are so large that the losses would be catastrophic for index fund shareholders.
The Fidelity Nasdaq Composite ETF produced monster returns over the last two decades
The Nasdaq Composite has historically been volatile due to its concentration in growth stocks. For instance, the index declined 36% during the last bear market, whereas the more diversified S&P 500 fell only 25%. But investors have been compensated for that volatility.
The Fidelity Nasdaq Composite ETF has been a phenomenal investment over long periods of time. The index fund returned 825% during the last two decades, increasing at 11.7% annually. At that pace, $300 invested monthly in the index fund would be worth $65,500 in one decade, $263,700 in two decades, and $862,800 in the three decades.
Some investors may want to save less and others may want to save more. The chart below illustrates how different monthly contribution amounts would grow over time.
|
Holding Period |
$200 per month |
$400 per month |
$500 per month |
|---|---|---|---|
|
10 years |
$43,600 |
$87,300 |
$109,200 |
|
20 years |
$175,800 |
$351,600 |
$439,500 |
|
30 years |
$575,200 |
$1.1 million |
$1.4 million |
Calculations by author. Figures shown above assume an annual return of 11.7%. All dollar amounts have been rounded down to the next $100.
The Fidelity Nasdaq Composite ETF bears a below-average expense ratio of 0.21%, meaning the annual fee on a $10,000 portfolio would be $21. Ultimately, it would be hard to find a cheaper index fund with a better track record. That's why patient investors comfortable with volatility should regularly buy a few shares of the Fidelity Nasdaq Composite ETF.
