If you've got $500, you could invest it all in a single stock. But a better move is to buy an exchange-traded fund (ETF) that lets you invest your money across hundreds, or even thousands, of stocks -- all in just one purchase.
The Vanguard S&P 500 ETF (VOO -1.04%) is one of the most reliable investments on the planet, and it has dirt cheap fees. Read on to learn how a $500 investment in this top S&P 500 index fund could send your net worth skyrocketing.
Image source: Getty Images.
What is the Vanguard S&P 500 ETF?
The Vanguard S&P 500 ETF, or VOO, is a fund that tracks the S&P 500 index, a collection of 500 of the largest and most profitable publicly traded companies in the U.S. The fund's top five holdings are as follows:
1. Microsoft (MSFT -1.73%)
2. Apple (AAPL -1.32%)
3. Nvidia (NVDA -2.09%)
4. Amazon.com (AMZN -1.45%)
5. Meta Platforms Class "A" shares (META -0.59%)
With this fund, or any index-tracking fund for that matter, the goal is to replicate the underlying index as closely as possible. So if the S&P 500 index notched returns of 20%, you'd expect the VOO to deliver about the same returns, minus fees. But since the VOO's ETF expense ratio is an ultra-low 0.03%, meaning just $3 of a $1,000 investment goes toward fees, the fund's returns are almost identical to those of the S&P 500 index.
How to grow $500 into $1 million
If you starting investment is $500 and you can budget an additional $500 each month, your investment could grow to $1 million after about 30 years. Historically, the S&P 500's average annual returns are around 10%.
Returns are significantly higher in some years, while the index has negative returns in some year. But even after prolonged downturns, the S&P 500 index has an incredible track record of bouncing back.
Here's how a $500 monthly investment could grow over time, assuming 10% average annual returns.
| Time | Growth of $500 Monthly Investment |
|---|---|
| After 5 years | $39,391 |
| After 10 years | $102,025 |
| After 20 years | $365,367 |
| After 30 years | $1,048,371 |
Data source: author.
Investing in the VOO isn't going to make you a millionaire overnight. But if you consistently invest over a long period, earning market returns allows your money to compound into serious wealth thanks to the power of compounding.
It's essential to stay the course even during a bear market, when you may be tempted to put your investments on pause -- or worse yet, cash out. Most investors fare best when they practice dollar-cost averaging, a strategy where you invest a set amount on schedule, regardless of whether the market is up or down. Investing $500 in the VOO at the beginning of each month is an example of dollar-cost averaging.
If you want to supercharge your returns on Vanguard's S&P 500 ETF, consider opening a Roth IRA to buy your shares. You won't get an upfront tax break, but if you follow the rules, all withdrawals will be tax-free in retirement. Given the power of those compound earnings, investing in the VOO through your Roth IRA could lead to substantial tax-free wealth in the future.
