More and more investors are discovering the benefits of adding exchange-traded funds (ETFs) to their portfolios. While these funds have some similarities to the mutual funds that are offered by various investment firms, they are quite different overall.
One big difference is that ETFs trade like stocks, so you can buy or sell them during any trading day in quantities as small as $1. Some ETFs are even structured to mimic index funds (and a few are effectively the publicly traded versions of privately run mutual funds), and they buy the same securities included in the index they follow.
What ETFs are really good at though is helping investors who may not be stock-picking experts enjoy robust portfolio growth. Many an investor these days are funding their retirement simply with some low-fee index-based ETFs. Even famed investor Warren Buffett recommends most investors focus on S&P 500 index-based ETFs.
Image source: Getty Images.
Big bucks from ETFs
History has shown that your invested money is likely to grow most briskly if it's invested in the stock market over a long period. The key word in that statement is likely. The stock market offers no guaranteed returns, and while you should hope for the best you should also have reasonable expectations.
Let's crunch some numbers, just to see what's possible. The S&P 500 has averaged annual returns close to 10% (ignoring inflation) over the past couple of decades. If you look at the average since the S&P 500 took its current form, it's closer to 8%. So, in this model, let's include a conservative average growth rate of 8%. If investors want to outperform the S&P 500 and find some ETFs growing at more than twice that rate, there are some options to consider (more on this below). But let's remain somewhat conservative and assume a 15% average annual gain.
The chart below shows how an annual investment of $6,000 (or $500 per month) might compound over various time periods at those percentage rates:
|
$6,000 Invested Annually for |
Growing at 8% Annually |
Growing at 15% Annually |
|---|---|---|
|
5 years |
$38,016 |
$46,552 |
|
10 years |
$93,873 |
$140,096 |
|
15 years |
$175,946 |
$328,305 |
|
20 years |
$296,538 |
$706,861 |
|
25 years |
$473,726 |
$1,468,272 |
|
30 years |
$734,075 |
$2,999,742 |
|
35 years |
$1,116,613 |
$6,080,074 |
|
40 years |
$1,678,686 |
$12,275,723 |
Source: Calculations by author.
Given enough time of consistent investment, you can reach $1.5 million by investing in funds with consistent growth. And you can get there faster by investing more than just $500 per month.
Opting for fast-growing ETFs
If you need that faster growth but still want some diversity in your investment picks, there are a few specialty ETFs worth considering. Three you might want to take a closer look at are the iShares Semiconductor ETF (SOXX -0.51%), the Technology Select Sector SPDR ETF (XLK -1.47%), and the Vanguard Information Technology ETF (VGT -1.69%). Compared to the SPDR S&P 500 ETF (SPY -0.74%), which models itself on the S&P 500 index, each is generating far better returns over time.
|
ETF |
Expense Ratio |
5-Year AAR |
10-Year AAR |
15-Year AAR |
|---|---|---|---|---|
|
SPDR S&P 500 ETF |
0.095% |
15.11% |
13.03% |
14.84% |
|
iShares Semiconductor ETF |
0.35% |
31.83% |
25.90% |
23.47% |
|
Technology Select Sector SPDR ETF |
0.09% |
24.73% |
21.17% |
20.11% |
|
Vanguard Information Technology ETF |
0.10% |
23.49% |
21.31% |
20.33% |
Source: Morningstar.com, as of July 16, 2024. AAR = Average annual return.
Here are a few things to keep in mind as you investigate these ETFs and as you narrow down how you might want to invest in any (or all) of them:
- While these three ETFs offer more diversity than buying individual stocks, they do focus on tech growth stocks in specific sectors. One way to mitigate the reduced diversity is to buy a range of high-performing ETFs instead of just one. ETFs that are tech-heavy, for example, are likely to have a lot of their assets in the same stocks, such as Microsoft, Apple, and Nvidia. So carefully select your ETFs to ensure there is still some variety in your holdings.
- While the past performance seen in the chart above is great, it doesn't guarantee future performance. The economy could change in some big way, the market could crash and remain down for some years, and/or certain sectors (like tech) might perform poorly for a while. This is why you need a long-term investing strategy that includes buying and holding to help you ride out short-term headwinds.
- While the featured funds all outperformed the S&P 500 ETF over the past 15 years, that ETF still performed well. You might opt for a compromise, parking some portion of your long-term dollars in the S&P 500 index-focused fund along with buying into the more aggressive investments. Aim for a mix that will reduce worry and help you sleep at night.
Be sure to take the time to develop a solid overall retirement plan, and then stick to it -- whether it has you investing in ETFs or not. Your money can grow like gangbusters if you keep your eyes on the prize. Making good use of tax-advantaged retirement accounts, such as IRAs and 401(k)s, is also smart.
