The Vanguard S&P 500 ETF (NYSEMKT: VOO), which tracks the S&P 500 index, is one of the most popular exchange-traded funds (ETFs) out there. And there is a good reason for this: The ETF has a long track record of strong returns. Even better, Vanguard manages to provide those returns while maintaining low fees.
High fees for funds can eat into investors’ returns, but with a minuscule expense ratio of just 0.03%, investors get to keep virtually all their gains when investing in the Vanguard S&P 500 ETF.
Low fees and solid returns are real pluses for this fund, but can the Vanguard S&P 500 ETF make you a millionaire?
The power of compounding
Over the past 10 years, the Vanguard S&P 500 ETF has generated an average annual return of 13.3% (as of the end of September). While that may not sound like a lot, it works out to a cumulative return of 249.7%. That means that if you invested $20,000 in the ETF 10 years ago you’d have $70,530 10 years later.
And since the ETF’s inception in September 2010, it has generated an average annual return of 14.7%. Its cumulative return over those 14 years is 587.9%. So that same $20,000 investment, over just four more years, would now be worth about $136,820.
Data by YCharts.
Those are some great returns, but still not $1 million. However, if investors were able to get a 14.7% average annual return over the next 30 years, a $20,000 investment (compounded annually) would be worth $1.22 million after that period. So yes, it is possible, it just takes a long time.
But what if you don’t have 30 years to wait? There is a much quicker way to use the Vanguard S&P 500 ETF to become a millionaire, and that is through steady investment over time. Starting with that initial $20,000 investment and just waiting for it to grow works, but it’s a slow process. What if, after that initial $20K investment, you started adding an additional $1,000 a month? If that 14.7% average annual return (compounded annually) continues, you will hit the $1 million goal in roughly 17 years. If you were able to invest $2,000 a month, the total would hit $1 million in just over 13 years.
There are a few caveats here to be clear about. Given that the market fluctuates, investors don’t get a steady fixed rate of return over multiple years the way they would with a bond. So actual returns will vary somewhat from year to year just like the market does. And just because this ETF averaged 14.7% annual returns in the past is no guarantee it will continue at that rate forever. But there is a very good chance it will grow over time.
Using the Vanguard S&P 500 ETF to become a millionaire, though, requires that you do two things. One is to start early, as the compounding effect confers its huge benefit only after some time has elapsed. The other is to be consistent and do your best to invest each month.
For example, the example above referenced that a $20,000 initial investment would be worth $1.2 million after 30 years (with a 14.7% annual return compounded annually). With an additional $2,000 investment made at the end of each month, the total would compound up to $11.7 million after 30 years. Even if returns were to drop to an average annual return rate of 12%, the investment would still be worth $6.7 million after 30 years. That’s multi-millionaire status.
Image source: Getty Images.
Market at all-time highs
Now, investors may be worried about investing in the Vanguard S&P 500 ETF with the index trading around all-time highs. However, history actually tells us that investing on days the market hits an all-time high is just as good as, if not better than, investing on any other day.
According to research from J.P. Morgan, since 1970, investing in the S&P 500 only on days that it hits an all-time high has generated annual returns of 9.4% after one year and 20.2% after two. Investing at random has produced returns of 9% after the first year and 18.5% after two. Between 1988 and 2020, the outperformance was even greater, with one-year returns of 14.6% and 11.7% respectively.
The average bull market lasts about 60 months, while the average bear market lasts only about 14. Investors who wait for a market pullback miss out on a lot of gains.
To become a millionaire through investing in an S&P 500 ETF, investors need to start early and consistently add to their investments in good markets and bad. That is the key to long-term wealth building.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.