The Vanguard S&P 500 ETF (VOO 0.55%) is one of the market's most popular exchange-traded funds (ETFs). It tracks the S&P 500 (^GSPC 0.53%) market index with pinpoint precision and minimal fees. If you haven't bought your first stock or fund yet, this Vanguard ETF may be the only investment you'll ever need.
Then again, maybe you can do even better with a different index fund from Vanguard. One popular option is the Vanguard Information Technology ETF (VGT 0.17%) -- another simple index fund focused on stocks in the tech sector. Launched in January 2004, this ETF's market history is 6 years longer than the VOO fund's and the returns are pretty impressive.
Can this fund make you a millionaire, and what would it take to reach that investing pinnacle?
Let's have a look.
A tale of two Vanguard ETFs
First, let's see how the IT ETF has fared against the basic S&P 500 index in the long run:
VGT Total Return Level data by YCharts
The fund has delivered a 1,420% total return since inception. That's more than double the broader market's 692% gain over the same period.
However, this ETF did not double the average annual returns of the S&P 500. Thanks to the mathematical magic of compound returns, the annual return difference was just 14.6% versus 10.9%. Keep that yearly advantage up for two decades and you'll double the returns of the slower fund. Add another decade, assuming the same long-term return rates, and you'd see a 167% outperformance in the end. The outperformance only grows larger over time, as long as the two funds can deliver consistent returns.
Small advantages per year can grow to game-changing investment results in the long run. The Vanguard IT fund has provided enough of a bonus gain to change the calculation for investors who want a million-dollar nest egg someday.
How much money do you need to invest, you future millionaire?
You've seen the IT ETF's average performance over the long haul. How much would you need to invest to have a million after 20 years? A $70,000 starting investment hits the mark with a compound average growth rate of 14.6%, growing into approximately $1.07 million in three decades.
The earlier you start investing, the smaller you can start. If you bought some Vanguard IT ETF shares 30 years before retirement, you could make a million dollars from a nest egg of roughly $18,000. And if you're a 20-year-old Wall Street whippersnapper with at least 40 years to go before retirement, you'd only need $4,500 in seed money.
So the math checks out -- you can definitely make a million dollars with the Vanguard IT ETF, given a modest starting investment and a long enough time period. You'll get there even faster by adding more funds along the way, and don't forget to reinvest dividends in more shares. Your journey to $1,000,000 will slow down dramatically without the dividend reinvestment program (DRIP). Remember, small annual differences add up quickly when you multiply them over and over.
Will the Vanguard IT ETF keep making millionaires?
So this fund can make you a millionaire, but how likely is it that it keeps delivering 14.6% annual gains for several decades?
There are no guarantees. Past performance is not a promise of future results. This fund barely kept up with the S&P 500 in its first 10 years, for example:
VGT Total Return Level data by YCharts
The fund obviously benefits from market-beating growth in the tech sector. That's a common market theme, but some periods move in the opposite direction.
The fund's three largest components are Apple (AAPL -0.08%), Nvidia (NVDA 0.10%), and Microsoft (MSFT 0.11%). These three stocks add up to 45% of the total portfolio right now, so you're placing a lot of trust in this trio. The same three stocks are also the top three Vanguard S&P 500 ETF holdings, but with a smaller total impact of 20%. Furthermore, the IT fund holds about 316 different stocks versus 504 names in the S&P 500 tracker. If robust diversification is a key goal in your strategy, the IT ETF might not be your best choice after all.
But I can't help noticing that the IT fund still matched the S&P 500 option in a weaker period, pulling away to a large advantage when the tech sector found its feet. All things considered, you can't go far wrong with this alternative index fund. And when times are good, it can be really spectacular instead.
