Some investors like to analyze and pick individual stocks for their portfolios. They believe they have the skills and the time to do this successfully. But for other investors, buying an exchange-traded fund (ETF) might be a better solution that can provide broad exposure to certain indexes, industries, or themes.
There's perhaps no fund more popular than the Vanguard S&P 500 ETF (VOO 0.04%), which tracks the performance of the broader S&P 500. But is this ETF a millionaire maker? Here's what investors should know.
Composition
Investors first need to take the time to understand what this ETF is all about. That starts with getting to know its composition.
This investment vehicle follows the price movements of the overall S&P 500. It consists of 500 large and profitable businesses that are based in the U.S. Essentially, this means investors would be betting on the ongoing growth and innovation that takes place in this country over time, which has historically been a lucrative approach.
Despite having 500 holdings, there are a select few companies that make up a sizable chunk of the overall portfolio. Due to the remarkable rise of technology enterprises in the past decade, the so-called "Magnificent Seven" represent 29% of the entire Vanguard S&P 500 ETF. But on the other end of the spectrum, there are all kinds of smaller businesses that have lower market capitalizations, like investment manager Franklin Resources and insurer Globe Life.
Investors benefit by not having to pick single winners for their portfolio. And even better, the cost to buy this ETF is extremely low. It carries an expense ratio of just 0.03%. This means that for every $10,000 you invest in the Vanguard S&P 500 ETF, you only pay $3 in fees annually. Consequently, you get to keep more of your money over time, a huge benefit.
Looking at the past
When trying to assess if the Vanguard S&P 500 ETF has what it takes to turn you into a millionaire one day, it's crucial to understand its track record. Since the fund's launch in September 2010, it has generated a total return (a figure that includes dividends) of 538%. That's an outstanding performance for a passive investment vehicle that most likely beats the return of the vast majority of professional active money managers.
Had you invested $158,000 in the Vanguard S&P 500 ETF in 2010, you would have $1 million today. It has certainly helped that fiscal and monetary policy became very stimulative following the Great Recession and throughout the 2010s, as well as during the pandemic. This backdrop promotes GDP growth and incentivizes investors to buy riskier assets to earn better returns.
Thinking about the future
Of course, we all know that past performance doesn't guarantee future results. Investors need to think about the potential for returns as we look ahead.
Zooming out, the S&P 500 has produced a total return of roughly 10% per year dating back almost a century. It might be safe to assume that it reverts back to this mean, down from its above-normal returns in recent times. This means that a $10,000 investment today would turn into $1 million in about 50 years. But if you're able to dollar-cost average and invest an additional $500 per month, then you can get to $1 million in about 29 years.
Astute readers are probably wondering if it's still a smart idea to buy the Vanguard S&P 500 ETF while it sits near its all-time highs. My reply is that you should never focus on trying to correctly time the market. Instead, it's all about time in the market. Over long stretches, the starting point hardly matters in the grand scheme of things.
The Vanguard S&P 500 ETF can definitely make you a millionaire one day. All it will take is patience and discipline.
