ETFs
This simple ETF could turn $100 a month into $45,000
Warren Buffett still actively manages Berkshire Hathaway‘s huge portfolio, but he gave his wife surprisingly simple instructions for managing his inheritance once he passed away: invest 90% in a low-cost investment. S&P500 index fund and the remaining 10% in short-term government bonds.
John Bogle, who popularized index funds through The Vanguard Group, shared a similar view. Bogle argued that since most fund managers couldn’t consistently beat the S&P 500, it was smarter to simply invest in a fund that passively tracked the benchmark. S&P 500 index funds also charge much lower fees than actively managed funds.
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Today, it’s easy to invest in the S&P 500 through index funds, which trade only once a day, or exchange-traded funds (AND F), which are actively traded throughout the day. So today I’m going to tell you why one of the most popular ETFs – the Vanguard S&P 500 ETF (NYSEMKT:VOO) – could easily turn modest monthly investments of $100 into over $40,000.
What is the Vanguard S&P 500 ETF?
Vanguard’s S&P 500 ETF was launched in 2010. It passively invests in the S&P 500 index, charges a low expense ratio of 0.03%, and has a minimum investment of just $1.
If you had invested $100 every month in the ETF since its inception, you would have invested $16,500 over 165 months. After including reinvested dividends, the total value of these holdings would now be worth $45,943 – representing a 178% gain – and generate approximately $600 in annual dividends.
The S&P 500 has generated an average annual return of about 10% since 1957. Assuming it grows at a similar rate over the next few decades, the Vanguard S&P 500 ETF could generate comparable gains over the next two decades .
But is dollar-cost averaging really the best idea?
By investing $100 in the S&P 500 each month, investors can use dollar cost averaging to eliminate short-term noise. You would buy more shares of the ETF when the market is down and buy fewer shares when it is recovering.
This is a safe approach for most investors who don’t have time to follow the markets, but it also has major drawbacks. The ETF has actually grown 393% since its inception and generated a total return of 539% after including its reinvested dividends. If you had invested a lump sum of $16,500 in Vanguard’s ETF and simply left it alone, your investment today would be worth about $105,500 and would pay $1,370 in annual dividends.
The lump sum investment generated greater gains because you would have acquired all of your shares at a lower price instead of paying higher average prices in subsequent years. So, even if you can’t make a large initial investment, you should still try to increase your monthly investments as much as possible to increase your long-term returns.
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But beware of short-term risks
Placing $100 in this ETF each month is an easy way to stay invested with minimal risk, but investors shouldn’t put the cash they’ll need into it over the next few years because the S&P 500 may still experience prolonged declines .
The S&P 500 is historically expensive right now, at 25 times forward earnings, and information technology stocks including Microsoft, AppleAnd Nvidia — represent more than 30% of the entire index. Many of these stocks are being pushed higher by AI’s stock buying frenzy. If these market leaders stumble in the coming quarters, the S&P 500 could see a sharp decline.
That said, Vanguard’s S&P 500 ETF remains a great long-term option for investors who don’t plan to cash out for a few decades. Lump-sum investments may fare better, but dollar-cost averaging is still a sure way to drive markets higher.
Should you invest $1,000 in the Vanguard S&P 500 ETF right now?
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Leo Sun has positions at Apple. The Motley Fool holds positions in and recommends the Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETFs. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Mad Motley has a disclosure policy.
This simple ETF could turn $100 a month into $45,000 was originally published by The Motley Fool