When trying to decide how to invest your money, sometimes the best way to start is to buy a broadly diversified index fund. The Vanguard Total Stock Market ETF (VTI +0.42%) is one of the best exchange-traded funds (ETFs) to help build a portfolio.
This fund is simple, low-cost (with an expense ratio of only 0.03%), and lets you own more than 3,400 U.S. stocks, giving you exposure to pretty much the entire American stock market. The word "total" in its name is accurate.
For the past 10 years, the Vanguard Total Stock Market ETF has been on a tear, delivering 15.1% average annual returns. If you could invest regularly in this fund and earn those returns over the long term, you might be surprised at how much your money could grow.
Let's look at how an investor's money might grow by investing $500 a month in this Vanguard ETF -- and a few reasons to be cautious along the way.
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Vanguard Total Stock Market ETF: 3,484 stocks, 10 years of 15.1% annualized returns
The Vanguard Total Stock Market ETF is just what the name sounds like: an ETF that lets you own the entire stock market. It only invests in U.S. stocks, but it includes 3,484 stocks of all sizes of companies: large-caps, mid-caps, and small-caps. That makes this fund more diversified than an S&P 500 ETF, which only includes large-cap stocks.
For the past 10 years, this fund has delivered average annual returns (by net asset value) of 15.1%. In the past five years, its annualized returns have been slightly lower: 12.9%.
NYSEMKT: VTI
Key Data Points
The fund's top holdings by sector are technology (42.3% of the fund), consumer discretionary (12.8%), industrials (11.8%), financials (9.7%), and healthcare (8.5%). The top 10 stock holdings are all major tech names.
But the point of owning this fund is not to pick stocks or beat the market. The purpose is to just own the entire U.S. stock market and let the market sort out the winners and losers over time.
How much $500 per month in VTI could grow
What if you could invest $500 per month in the Vanguard Total Stock Market ETF? Let's see what happens, assuming the fund keeps delivering the same returns it has for the past 10 years.
If you start with $0 invested and put $500 per month into this ETF, at 15.1% average annual returns, your investment would grow to $40,534 after 5 years, $122,419 after 10 years, and $621,995 after 20 years. After 25 years, you'd have $1.29 million.
What if your investments don't grow that fast?
The past 10 years have been more lucrative than usual for VTI, so it may not be realistic for investors to expect to earn 15% annualized returns going forward. If you look at this fund's longer-term performance, in the past 25 years since the fund's inception in May 2001, it has delivered annualized returns of 9.53%.
Let's see what happens if this ETF's next 25 years of returns are just like the last 25. If you start from $0, invest $500 a month and earn 9.53% per year, after 5 years, you'd have $36,289. After 10 years, you'd have $93,496. After 20 years, you'd have $325,835. And after 25 years, you'd have $549,935.
That's well short of millionaire status, but still a solid gain, even if this fund doesn't keep up its recent exceptional performance.
Even the best total stock ETFs offer no guarantees
Remember: Past performance doesn't predict future results. There's no guarantee that this ETF or any investment will deliver 15% returns per year, or 10% returns, or any returns. But most of the time, in the long run, long-term investors who buy a broad stock market index ETF like the Vanguard Total Stock Market ETF will make money.
That's because companies tend to be good at making profits. Over time, they figure out how to get better at making things and selling services. They innovate and find efficiencies to drive earnings higher. I own this fund because I believe in long-term investing at low costs in a diversified portfolio of thousands of stocks. Buying this total stock market ETF and steadily investing month after month could be a solid strategy for many long-term investors to gradually build wealth.
