Exchange-traded funds are no longer a mere garnish for investors, simply there to help diversify portfolios heavily weighted toward traditional stocks, bonds and mutual funds. These days, ETFs have become a main course as more investors flock to them for their flexibility, variety and profit potential.
Whether or not you can turn those profits into millions of dollars before you retire largely depends on how (and how much) you invest in ETFs. But with the right strategy, it’s certainly possible to retire a millionaire by putting your money into only ETFs.
First, a brief primer for the uninitiated: An ETF works like a regular index fund in that it is comprised of a basket of securities that usually track an index. The difference is, ETFs trade on exchanges like stocks. Most are passively managed, meaning fees are low.
As GOBankingRates previously reported, ETFs are a good option for investors without a lot of capital because you can build a highly diversified portfolio without having to invest a great deal of money.
Many investors have taken note. About $7 trillion is currently invested in ETFs in the U.S., Motley Fool reported recently. That’s up by more than one-quarter since the end of 2020 and more than seven times the total from a decade ago. Younger folks are leading the charge, with ETFs making up nearly one-third of millennial investors’ portfolios, according to Kiplinger, which cited data from the annual Charles Schwab ETF Investor Study.
One key to accumulating enough money in ETFs to retire a millionaire is diversification. These funds span the investor spectrum — from aggressive to very conservative — and are tied to all types of indexes and assets, ranging from the Nasdaq and S&P 500 to Bitcoin. To make millions, it helps to dip your toe into several different ETF types.
To use Motley Fool’s example, say you started out with $20,000 to invest in four different ETFs: Investco QQQ (aggressive growth), SPDR S&P 500 Trust (large cap), Vanguard Total Stock Market ETF (total market), and iShares Russell 2000 Growth ETF (small cap).
Next, suppose you originally invested $5,000 in each ETF and then invested $100 per month in each for 30 years. Based on prior performance, you should have nearly $1.1 million by 2051. Here’s the math:
- The Invesco QQQ has averaged a 9.7% annualized return over the past 30 years, and if it does the same thing over the next 30 years, you’d have about $303,000 with the above strategy.
- The SPDR S&P 500 Trust, with its normal 10.3% return, would total about $349,000 in 30 years.
- The Vanguard Total Stock Market ETF (a 9% return since inception) would total about $257,000 after 30 years.
- The iShares Russell 2000 Growth ETF (6.9%) would have about $159,000 in 30 years.
The total? About $1.068 million. Just keep in mind that there’s no guarantee these ETFs will produce the same returns in the future that they have in the past, or even come anywhere close. This means your profit could be a whole lot less — or even head into negative territory.
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