ETFs
Is the Vanguard Total Stock Market ETF a maker of millions?
This fund enjoys a slight performance advantage over more familiar alternatives, but don’t lose sight of what really matters.
Do you dream of becoming a self-made millionaire, but you’re not a professional athlete or artist and your salary is just average? You’re not alone.
Fortunately, even without particular sought-after skills or extraordinary income, it is still possible for you to invest to achieve millionaire status. It won’t take you much time either. Hell, you’re probably better served spending less time on the effort than most people. In fact, just one investment might be enough. The key is simply to make the most of the money you can find, which often means leaving it alone even if it doesn’t feel right to do so.
An investment that ticks all the boxes is the Vanguard Total Stock Market ETF (VTI 0.77%), which – as the name suggests – is an investment in the performance of the entire stock market.
Less is more, and simpler is better
Relatively new investors may disagree with this idea. Choosing the winning stocks and avoiding the bad ones seems to be the key to everything. Financial media and brokerage The industry also has a certain penchant for encouraging commercial activities. It’s easy to get caught up in the “pursuit of performance.”
However, this is not how most investors ultimately make most of their money. In fact, it’s better in the long run to buy and hold quality stocks for as long as possible, even if it gets a little uncomfortable.
But what actions? That’s just it – it doesn’t really matter. Assuming you choose a handful of quality names that are sufficiently diverse, you’ll likely achieve good long-term results with a simple buy-and-hold approach. In fact, you will probably do better than most active investors.
You do not believe in it ? Consider this. Data compiled by Standard & Poor’s indicates that over the past five years, nearly 79% of large cap mutual funds available to investors in the United States have underperformed S&P500 (^GSPC 0.80%). If we extend the period to 15 years, 88% of these funds failed to keep up with their benchmark comparisons. In the meantime, Goldman Sachs According to reports, most hedge funds also underperformed last year (again) relative to the broader market, with several losing money despite the market gaining in its together.
Soak it up for a moment. The majority of these well-paid and well-equipped fund managers not only failed to add value, but ultimately cost their clients money through the underperformance of other investments that they would have just as could well have held.
Take the hint. If these professionals are struggling to beat the market, perhaps amateurs shouldn’t strive to do the same.
The question remains though: Is the Vanguard Total Stock Market ETF some kind of choice for millionaires?
Putting the Vanguard Total Stock Market ETF to the Test
In fact, the question misses a key point: How much money are you currently working with, and how much will you add to the effort in the future?
But first: Let’s at least begin to answer the overarching question by recognizing – from a odds-making perspective – that your best bet is a broad-based index fund like the Vanguard Total Stock Market ETF. When you have an interest in exchange traded fund you own a share weighted according to the market capitalization of the approximately 3,700 American stocks listed on the stock exchange. It is guaranteed to keep pace with the entire stock market, because it is the market. Funds spending rate is also almost zero at 0.03%, meaning Vanguard’s compensation for managing the ETF has a negligible impact on your net return.
Most importantly, this fund delivers the returns you expect from a total stock market fund. Its average annual return over the past 10 years is 12.2%, according to figures from The morning starand this figure reached 14.4% over the last 15 years.
However, to be on the safe side, let’s assume that the lower of these two values is the reproducible standard. How would that allow a newcomer to reach $1 million? It depends. If you have 30 years to work, investing $300 per month ($3,600 per year) in the ETF would do the trick. However, many of us may not make it to 30 before we need to dip into that nest egg. If you only have 20 years left, you’ll need to allocate the hefty sum of $1,000 per month (or $12,000 per year) to this choice. And if you only have a decade to work… well, that’s going to require $4,500 a month, or $54,000 a year.
Obviously, much of this compound growth occurs during the latter part of the period in question. This is why it is so beneficial to start as early as possible.
Of course, regular contributions over time aren’t the only way to grow a seven-figure reserve. Assuming this Vanguard ETF continues to perform as it has since its inception in 2001, a $27,000 investment today could be worth $1 million in 30 years. If you need $1 million in 15 years, that will likely require an immediate $170,000 investment in the ETF.
It’s less about the ETF and more about you
Of course, past performance is no guarantee of future results. Something could change to limit this ETF’s future returns.
It is also worth pointing out that alternatives such as SPDR S&P 500 ETF Trust (TO SPY 0.91%) and the Invesco QQQ Trust (QQQ -0.19%) can offer similar results. The Vanguard Total Stock Market ETF is a compelling choice simply because it has a slightly stronger long-term track record than the S&P 500, perhaps because it is exposed to faster-growing mid- and small-cap stocks. However, the Vanguard fund also generally lags behind the performance of the Invesco QQQ Trust.
The fact is that most index funds fall within the same basic range in terms of long-term performance. This one is no exception.
So the most important thing to remember is that the millionaire potential of a particular ETF has less to do with that fund and more to do with what you do with it. The Invesco QQQ Trust and SPDR S&P 500 ETF Trust are also millionaire ETFs if you are able to put enough money into them and, more importantly, leave them alone for years. Let time do the heavy lifting, no matter which ETF you choose.