The stock market can help you build wealth that lasts a lifetime, but choosing the right investments is critical to maximize your earnings while limiting risk.
Exchange-traded funds (ETFs) can be a smart option for those who want a low-maintenance investment that requires next to no upkeep. An ETF is a basket of securities bundled together into a single fund, so by investing in just one share of an ETF, you'll instantly own a stake in dozens or even hundreds of stocks.
Image source: Getty Images.
Growth ETFs, in particular, are funds designed to beat the market. They contain stocks with the potential for above-average returns, and you could potentially earn far more with this type of investment than, say, a broad-market fund like an S&P 500 ETF.
There are countless ETFs to choose from, each with its unique advantages and disadvantages. But one of the most popular options is the Vanguard Growth ETF (VUG 1.82%), and it could potentially turn $200 per month into $820,000 or more. Here's how.
Why invest in the Vanguard Growth ETF
The Vanguard Growth ETF contains 208 stocks with the potential for higher-than-average returns. It also has a rock-bottom expense ratio of 0.04%, meaning you'll pay $4 per year in fees for every $10,000 in your account. This is far lower than many other ETFs, which could save you thousands of dollars in fees over time.
One other advantage of this particular ETF is that it aims to balance risk and reward through its mix of stocks. The fund's top 10 holdings make up around half of its entire composition, and these stocks are household names such as Amazon, Apple, Microsoft, and Visa.
The other half of the fund is made up of dozens of smaller stocks with loads of potential. While smaller companies often carry more risk (and can be more volatile), they're also more likely to experience explosive growth. If any one of these stocks becomes a superstar performer, you could see substantial returns.
This balance of juggernaut stocks along with up-and-coming companies can help maximize your earnings potential while still limiting risk. You'll still likely experience short-term volatility, but with half of the fund devoted to larger, more stable stocks, there's a greater chance your investment will see long-term growth.
Generating hundreds of thousands of dollars
It's impossible to say exactly how any investment will perform over time, and growth ETFs, in particular, can be more volatile than other types of funds. However, it can still be helpful to see how this ETF has performed in the past.
Over the past 10 years, the Vanguard Growth ETF has earned an average rate of return of 14.74% per year. Keep in mind, though, that your investment may or may not earn those types of returns going forward.
If you were to invest $200 per month, here's approximately how much you could accumulate over time depending on whether you're earning an 11%, 13%, or 15% average annual rate of return:
| Number of Years | Total Portfolio Value: 11% Average Annual Return | Total Portfolio Value: 13% Average Annual Return | Total Portfolio Value: 15% Average Annual Return |
|---|---|---|---|
| 20 | $154,000 | $194,000 | $246,000 |
| 25 | $275,000 | $373,000 | $511,000 |
| 30 | $478,000 | $704,000 | $1,043,000 |
| 35 | $820,000 | $1,312,000 | $2,115,000 |
Calculations by author via investor.gov.
To reach $820,000 in total savings, you'll need to invest consistently for around 35 years while earning a modest 11% average annual rate of return (which is slightly higher than the market's historic average return of 10% per year). If this ETF continues earning returns similar to the past decade, though, you could potentially earn far more.
Two important downsides to consider
Before you buy, it's also crucial to understand the risks that come with this type of investment. Past performance isn't indicative of future returns, so although this ETF has historically earned above-average returns, there are no guarantees that it will continue doing so.
Also, growth ETFs tend to be more volatile in the short term than broad-market funds, like an S&P 500 ETF. While they're designed to beat the market over the long haul, the extreme ups and downs during periods of volatility can be difficult to stomach at times. If you invest in this ETF, be sure you're willing to ride out the storm during the inevitable market downturns.
The Vanguard Growth ETF can be a fantastic option for those looking for a low-effort investment that packs a punch. While there are never any guarantees when it comes to the stock market, by investing consistently and keeping a long-term outlook, you could earn more than you might think.
