Investing in exchange-traded funds (ETFs) can be a fantastic way to build wealth with less effort than buying individual stocks.
An ETF is a basket of securities grouped together into a single investment. Many funds contain hundreds of stocks, making it easier and more affordable to build a diversified portfolio. But not all ETFs are good investments, so it's critical to choose wisely when deciding where to buy.
It's possible to become a stock market millionaire with the right ETF, but there are some caveats. The Vanguard Information Technology ETF (VGT +0.44%) is a tech-focused fund with a history of earning above-average returns, but could it make you a millionaire? Here's what you need to know.
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A powerhouse performer
This ETF can be a fantastic option for those looking for a simpler way to gain exposure to the technology industry. It contains 320 tech stocks, including industry-leading juggernauts like Microsoft, Apple, and Nvidia.
Those three stocks alone make up more than 47% of the fund's total composition, so if you're eager to invest in tech's biggest players while maintaining more diversity than you would with individual stocks, this ETF could be a smart buy.
The Vanguard Information Technology ETF is also a powerhouse fund with a history of beating the market. Over the past 10 years, it's earned an average rate of return of 20.63% per year.
For comparison, the Vanguard S&P 500 ETF has earned an average return of just 13.11% per year in that time. Even the growth stock-focused Vanguard Growth ETF has earned an average return of 15.33% per year over the past decade. As far as growth ETFs go, the Information Technology ETF is one of the highest-performing Vanguard funds.
Reaching millionaire status
With this ETF's history of earning higher-than-average returns, there's a better chance you'll be able to reach $1 million or more over time. However, there's a big caveat: This ETF is riskier than many others.
Growth funds, in general, are more volatile than broad-market funds, such as S&P 500 ETFs. The tech sector is often hit hardest during periods of market turbulence, so you'll likely see more extreme ups and downs with this fund than you would with other ETFs.
NYSEMKT: VGT
Key Data Points
Also, while the Vanguard Information Technology ETF has managed to beat the market by a substantial margin over the past decade, there are no guarantees that it will continue to do so over time. If you're willing to take that risk for the chance at potentially higher returns, this fund could still be a good fit for your portfolio.
As far as how much you could earn, that will depend on how this ETF fares over time. Because tech-focused ETFs can be so volatile, it may be wise to consider multiple potential rates of return.
If you were to invest, say, $200 per month in this fund, here's approximately how much you could earn over time depending on whether you're earning a 20% average annual return (in line with this ETF's 10-year average performance), a 15% average annual return, or an 11% average return (slightly higher than the market's long-term average of 10% per year).
| Number of Years | Total Portfolio Value: 20% Avg. Annual Return | Total Portfolio Value: 15% Avg. Annual Return | Total Portfolio Value: 11% Avg. Annual Return |
|---|---|---|---|
| 20 | $448,000 | $246,000 | $154,000 |
| 25 | $1,133,000 | $511,000 | $275,000 |
| 30 | $2,837,000 | $1,043,000 | $478,000 |
Data source: Author's calculations via investor.gov.
It's possible to earn well over $1 million with this ETF, even if it earns lower returns compared to its recent 10-year average. Again, though, there's always a chance it could earn average or even below-average returns, so there are never any guarantees with this type of investment.
The right investment for you will depend on your goals and risk tolerance. Tech-focused ETFs like the Vanguard Information Technology ETF carry more risk than many other investments, but if you're willing to take that risk, you could potentially generate a substantial amount of wealth over time.
