This simple ETF could turn $500 a month into $1 million

By investing in an S&P 500 ETF, investors can benefit from the growth of the U.S. economy.

The great thing about setting financial goals is that there are no right or wrong goals; just goals that match your personal situation and ambitions. Some people are considering early retirement, while others are considering a major purchase. Regardless, the $1 million mark has long been a milestone for many people.

If you’re looking for an exchange-traded fund (ETF) that’s proven to take you to the land of millionaires, look no further than the Vanguard S&P 500 ETF (VOO 0.12%). Since its inception in September 2010, the Vanguard S&P 500 ETF has produced admirable returns, averaging just over 12% annual return and 14% annual return. total returns (which include dividends).

VOO data by Y Charts.

Past performance never guarantees future performance, so you don’t want to believe you can predict what will happen. However, assuming this trend continues, a monthly investment of $500 would cross the $1 million mark in about 25 years, with an average total return of 14%. If you go with the more “conservative” figure of 12%, that would hit the $1 million mark in about 27 years.

The Power of Compound Interest in Investing

Arguably the most powerful force in investing is compound interest (or compounding gains, as some call it). In investing, compound interest occurs when the money you earn on your investments begins to earn money on itself.

To see it in action, imagine you invest $500 per month ($6,000 per year) and earn 10% annual interest. The following table shows how compound interest works its magic when you reinvest your profits to start earning interest:

Year Starting balance Interest earned Ending balance

Calculations by author. Figures rounded to the nearest dollar.

If you had removed the $600 in interest earned after each year, you would have only earned $3,000 over those five years, compared to about $3,664. By putting your interest to work and letting it compound, you can reap all the benefits of compound interest, making the million-dollar mark more attainable.

So why the Vanguard S&P 500 ETF?

The Vanguard S&P 500 ETF is by no means the only ETF capable of turning $500 in monthly investments into $1 million. However, ETF is a great choice because it can serve as a one-stop shop for investors. It has the trifecta: diversification, blue chip stocksand low cost.

To start, the ETF contains companies from all 11 major sectors, ensuring investors have exposure to the diverse industries that make up the U.S. economy. In fact, the amount of land S&P500 covers is making an investment akin to an investment in the broader U.S. economy, by most accounts. It’s not foolproof, but history has shown that it’s one of the safest long-term bets you can make.

It’s not just about the number of companies held in the ETF; That’s the type of business. The ETF has well-established market leaders leading the way and contains all the blue-chip stocks in the US stock market (using inclusion in the Dow Jones as criteria since there is no official list).

In terms of costs, the Vanguard S&P 500 ETF’s 0.03% expense ratio is one of the lowest in the stock market, equating to a measly $0.30 per $1,000 invested. This ensures that investors keep more of their gains for themselves instead of paying them in fees.

Focus on consistency, no matter what

Many people have become millionaires by investing in an S&P 500 ETF, but consistency is key. It can be easy to want to time the market – avoiding investing when prices are high and going all-in when prices are low – but you should avoid this if you can.

A better approach would be to use spread of costs in dollars. In this case, you can divide your monthly investments of $500 into $125 per week, $250 every two weeks or whatever best suits your personal situation. The key is to stay consistent, regardless of what stock prices are doing at the time. This can help reduce the impact of volatility and put you in a better position over the long term.

Stay patient and play the long game, and you’ll be in a great position to be rewarded with a seven-figure investment.

Steve Walters holds positions in the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Mad Motley has a disclosure policy.

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