Investing in the stock market can help you build life-changing wealth over time, and exchange-traded funds (ETFs) are a low-maintenance way to invest with little effort on your part.
Like all investments, each ETF will have its own unique advantages and disadvantages. The right fund can help balance risk and reward, supercharging your earnings while still protecting your savings. With the right strategy, this unstoppable ETF could potentially make you a multimillionaire. Here's how.
A small-cap fund with plenty of growth potential
Small-cap stocks are generally defined as those with a market capitalization of between $300 million and $2 billion.
While these stocks can be more volatile than their large-cap counterparts, they also often have more room for growth. All industry-leading juggernauts need to start somewhere, and investing while they're still small-caps can potentially result in astronomical growth.
NYSEMKT: IJR
Key Data Points
Investing in a small-cap ETF, like the iShares Core S&P 500 Small-Cap ETF (IJR +0.04%), can help mitigate some of the risks of smaller companies. This fund contains 639 U.S. stocks from all market sectors, without leaning too heavily on any one sector -- and that diversification can hedge against volatility.
Building a $2 million portfolio
Since its inception in 2000, the iShares Core S&P 500 Small-Cap ETF has earned an average rate of return of 9.49% per year. Over the last five years, it's performed slightly better with an average return of 12.86% per year.
Let's say you have a goal of accumulating $2 million with this ETF. Here's approximately how much you'd need to invest each month, depending on the average returns you're earning and the number of years you have to save:
| Number of Years | Amount Invested per Month While Earning a 9% Avg. Annual Return | Amount Invested per Month While Earning an 11% Avg. Annual Return | Amount Invested per Month While Earning a 13% Avg. Annual Return |
|---|---|---|---|
| 25 | $2,000 | $1,500 | $1,100 |
| 30 | $1,225 | $850 | $575 |
| 35 | $800 | $500 | $325 |
| 40 | $500 | $300 | $175 |
Data source: Author's calculations via investor.gov.
If this ETF earns similar returns going forward as it has over the past five years, investing $175 per month could result in approximately $2 million after 40 years. Even if this fund underperforms, getting started investing earlier means you won't need to contribute as much per month to reach multimillionaire status.
Keep in mind, too, that small-cap stocks have the potential for explosive growth. If any of the stocks within this fund become superstar performers, you could earn significantly higher returns in the future.
The right investment could be life-changing, and investing in a small-cap ETF can be a smart way to build wealth while still limiting risk. By getting started early and investing consistently, you could earn more than you might think over time.
