Investing in the stock market is one of the most effective ways to build long-term wealth, but the right investments are key to maximizing your earnings while limiting risk.
Exchange-traded funds (ETFs) are baskets of securities bundled together into a single investment. Each fund may contain hundreds of stocks, and by investing in just one share of an ETF, you'll instantly own a stake in all of those companies. This can help you build a more diversified portfolio with next to no effort on your part.
Growth ETFs are a subset of these funds that are designed to earn above-average returns over time. All the stocks in this type of ETF have the potential for faster-than-average growth, and theoretically, they should be able to beat the market over time.
Not all growth ETFs are created equal, however, and some are better options than others. While there are never any guarantees when it comes to the stock market, these three funds could help you reach $500,000 or more from an investment of $200 a month while barely lifting a finger.
1. Vanguard Growth ETF
The Vanguard Growth ETF (VUG 1.82%) contains 208 stocks with the potential for above-average growth. One major advantage of this particular fund is its healthy mix of blue chip stocks and up-and-coming companies.
The fund's top 10 holdings make up around 50% of its overall composition. These stocks are from behemoth corporations such as Apple, Amazon, Nvidia, Microsoft, and Visa. The other half of the fund is made up of smaller stocks.
This mix can reduce your risk while still helping to maximize your earnings. Blue chip stocks may experience slower growth but are also generally strong and stable investments. Smaller stocks, on the other hand, carry more risk but have more potential for explosive growth.
Over the last 10 years, this Vanguard fund has earned an average rate of return of 14.74% per year. If you were to invest, say, $200 per month while earning a 14% average annual return, here's approximately how much you could accumulate over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $218,000 |
| 25 | $436,000 |
| 30 | $856,000 |
| 35 | $1,665,000 |
Data source: Author's calculations via investor.gov.
To reach $500,000 in total savings, you'd need to invest consistently for somewhere between 25 and 30 years. But the longer you're able to let your money grow (or the more you can contribute each month), the more you can potentially earn.
2. Schwab U.S. Large-Cap Growth ETF
The Schwab U.S. Large-Cap Growth ETF (SCHG 1.95%) contains 251 stocks with the potential for above-average growth. Similar to the Vanguard Growth ETF, the top 10 holdings make up around half of its total composition. However, when it comes to the way those stocks are spread across different industries, it's slightly more diversified.
Around 45% of Schwab's U.S. Large-Cap Growth ETF's stocks are from the tech sector, compared to roughly 56% for the Vanguard ETF. While it's normal for growth ETFs to be heavily centered around tech stocks, the more a fund leans on one particular industry, the more risk it generally carries. Schwab's more diversified approach can help limit your risk.
This ETF has earned an average annual return of 15.46% per year over the past 10 years, which is slightly higher than the Vanguard Growth ETF. If you were to invest $200 per month at a 15% average annual return, here's approximately how that would add up over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $246,000 |
| 25 | $511,000 |
| 30 | $1,043,000 |
| 35 | $2,115,000 |
Data source: Author's calculations via investor.gov.
3. Invesco QQQ
Invesco QQQ (QQQ 1.54%) is the least diversified of the three ETFs on this list as it contains only 101 stocks with nearly 58% of them from the tech sector. However, it's also a powerhouse investment with significantly higher average annual returns than the other two funds.
Over the past 10 years, QQQ has earned an average annual return of 17.66% per year. By investing $200 per month at a 17% average annual return, here's roughly how that could add up over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $312,000 |
| 25 | $701,000 |
| 30 | $1,554,000 |
| 35 | $3,424,000 |
Data source: Author's calculations via investor.gov.
There's a big caveat with this ETF, though. While it's earned extraordinary returns over the past decade, there are no guarantees that it will be able to maintain these types of earnings over time.
Growth ETFs, in general, are often more volatile than many other types of investments, and growth stocks usually carry more risk. Even the "safe" growth stocks tend to experience more extreme ups and downs in the short term than their more established counterparts.
ETFs like QQQ can achieve impressive returns, but it's crucial to be aware of the risk that comes with those potential rewards. This fund may or may not continue earning similar returns in the future, compared to its past. Even if it does see explosive growth, the short term can be incredibly volatile. Before you buy, be sure you're prepared for that level of risk.
Investing in growth ETFs is a fantastic way to build wealth, but the numbers are only one part of the equation. These types of investments are often more turbulent than other ETFs, so it's important to choose wisely based on your risk tolerance. As part of a well-diversified portfolio, the right growth ETF can help supercharge your savings.
