We all want to allocate capital like Warren Buffett. But investors don't always need to pick individual stocks to be successful in the stock market. It's totally fine to go the passive route, opting to choose exchange-traded funds (ETFs) for your portfolio. This is still a smart way to generate long-term wealth.
Vanguard is a well-known asset management firm that has many of these products for investors to pick from. And they can put up some serious returns. Take a look at this top Vanguard ETF that could turn $17,000 into $1 million.
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You need to know what you own
Investors should take a closer look at the Vanguard S&P 500 ETF (VOO +0.39%). As the name suggests, it tracks the performance of the overall S&P 500. This widely followed index contains 500 large and profitable U.S.-based companies. It's essentially a way to assess the performance of the U.S. economy. And investors who own this ETF are betting on ongoing American innovation. This has historically been a smart view to have, as the U.S. is by far the most dominant economy.
This ETF owns 500 different stocks. However, it's weighted by market cap, so there is some concentration to be mindful of. It shouldn't be surprising that technology companies have a higher weight. The top three positions in the Vanguard S&P 500 ETF are Nvidia, Microsoft, and Apple. The share prices of these companies have performed well in the past decade, which has lifted up the entire ETF.
Generally speaking, though, investors do gain broad exposure to all sectors of the economy. Tech stocks feature prominently, which means an inherent bet on trends like cloud computing, artificial intelligence, digital advertising, and streaming entertainment. However, companies in financial services, energy, and consumer discretionary sectors, for instance, are also in the ETF.
This ETF's performance is off the charts
In the last decade, the Vanguard S&P 500 ETF has generated a total return of 290% (as of Oct. 17). This translates to a phenomenal annualized gain of 14.6%. Assuming this performance continues over the next three decades, this ETF will be able to turn a starting investment of $17,000 into $1 million by 2055. It's difficult to argue about this type of fantastic result.
The investment management industry is interesting because customers often pay for products that underperform the S&P 500. Data shows that the vast majority of so-called experts, active fund managers who are known to charge exorbitant fees, put up returns that lag the popular benchmark. That seems like an unacceptable value proposition.
Despite its strong performance, the Vanguard S&P 500 ETF is an inexpensive investment vehicle. Its expense ratio of 0.03% means that on a hypothetical $1,000 investment, investors would only pay $0.30 for the fee on an annual basis.
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Key Data Points
The future could look different from the past
It's important that investors realize that the last 10 years have been an anomaly from a historical perspective. Over the very long term, the S&P 500 has produced a total return of about 10% per year. If this is what ends up happening in the future, then it will undoubtedly take investors a lot longer to turn $17,000 into $1 million.
No one has any idea what forward returns will look like. They could revert back to their historical average. Or they could mimic what we saw over the past decade. It's impossible to predict what will happen.
Recent trends don't seem like they will slow by much, though. The Federal Reserve is starting to lower interest rates, which can be a boon for the economy. Money continues to flow into the stock market via passive investment vehicles, demand that drives up stock prices. And technology companies are likely to continue dominating, commanding a greater share of the stock market's capitalization.
Regardless of what the next decade holds, investors who put money to work early and with a long-term mindset should be rewarded.
