Turn small investments into big returns with this surprisingly simple strategy — and a hands-off ETF investment for the ages.
Investing doesn’t have to be hard. If you don’t have the time and temperament to read financial statements and hand-pick excellent stocks, you can rely on exchange-traded funds (ETFs).
What looks and feels like a single stock ticker can represent a huge portfolio of diversified investments, and these simple insta-portfolios are perfect for automated investing. The results can be downright game-changing — especially if you find an ETF with a long history of market-beating returns — and minimal fees.
The Vanguard Growth ETF (VUG -0.17%) is one of those incredible set-and-forget ETFs. Through the magic of consistent investment and years of compound returns, a mere $100 per month should give you roughly $178,000 in two short decades.
Here’s how.
What is the Vanguard Growth ETF?
Let’s start with the growth-oriented Vanguard fund.
This index-tracker ETF checks every box on Vanguard founder Jack Bogle’s wish list.
- It’s a passively managed fund, simply reflecting the quarterly changes made in an independent market index. In this case, it’s the CRSP US Large Cap Growth Index.
- The index is quite diversified. Designed to match the top 85% of total market capitalization among American stocks in the “growth” category, the CRSP index currently shows 199 names.
- Thanks to a highly automated portfolio management system, the ETF charges annual management fees of just 0.04%. That’s $4 out of every $10,000 you’ve got invested in this fund. The average ETF on the market today carries annual fees of 0.5%, which is more than tenfold Vanguard’s fee ratio.
The underlying index is weighted by market cap, giving heavier price-moving weight to larger stocks. As expected, the entire “Magnificent Seven” group of high-growth tech giants are found among this fund’s top 8 holdings, interrupted only by pharmaceutical giant Eli Lilly. If you’ve been looking for a high-octane growth ETF with Vanguard’s legendary low-cost features, the aptly named Vanguard Growth ETF should fit the bill.
Can this ETF run with the big dogs?
It’s a great performer, too.
The S&P 500 (^GSPC -0.00%) index has enjoyed a compound average growth rate of 8% over the last 20 years. With reinvested dividends along the way, the annual growth rate swells to 10.1%.
Those are great long-term results, completely worthy of building an investment portfolio around. But they can’t keep up with the Vanguard Growth ETF’s results over the same period:
VUG Total Return Level data by YCharts
The growth-oriented ETF lives up to its name with a plain annual return of 10.3% in 20 years and a total return rate of 11.5%. And it’s not all about the recent artificial intelligence (AI) boom driving the growth fund sharply higher. It also outperformed the S&P 500 between 2004 and 2014, albeit by a slimmer margin.
VUG Total Return Level data by YCharts
Past performance is never a guarantee of future winnings. Still, it’s hard to argue with the Vanguard Growth ETF’s track record of robust long-term returns.
The magic of compound earnings over time
So what happens if you put $100 into the Vanguard Growth ETF every month, set the account to reinvest dividends into more ETF shares, and leave this automated system alone for 20 years?
Honestly, nothing but good things.
By May 2044, you will have added $24,000 to your chosen ETF. Doing it one small bite at a time, I hope you barely missed one Benjamin a month in the grand scheme of family budgeting.
But those hundreds started generating investment returns right away, and the boosted funds added more gains on top. It may not sound like a big deal, but those compound returns add up over time. Assuming that the Vanguard Growth ETF kept up its established growth rate for another couple of decades, you’ll have about $93,200 in your pocket.
Your invested dollars will have nearly quadrupled over the years, and you will never have to pick a winning stock. Set it and forget it, and let the math of compound returns on steady investments do its magic. There will be market dips and tech-innovation booms along the road, but they all smooth out to forgettable speed bumps.
Day-to-day price changes don’t matter as long as you’re investing more money in the market over time. This is dollar-cost averaging at its finest.
And if you can afford to add a little more money, your results will rise. Double the investment rate to $200 a month and you’ll get approximately $196,400 instead. Double the input, double the expected output.
Again, I can’t guarantee that everything will work out exactly this way — but luck favors the prepared, and few long-term preparations can beat automatically setting aside a few bucks in an investment account.
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Growth ETF. The Motley Fool has a disclosure policy.