What’s the most straightforward way to make $1 million? My answer is to consistently invest in a diverse group of stocks over the long term. This approach is kind of like the tortoise in Aesop’s fable about the tortoise and the hare. It might not be exciting, but it can help you win the race.
I also think that the easiest way to invest in a diverse group of stocks is to buy exchange-traded funds (ETFs). There are lots of fund managers to choose from, but Vanguard is well known for its low fees — a big plus for growing your money.
Even within the family of Vanguard funds, you’ll have lots of choices. Several especially stand out in my view, though. Here are five Vanguard ETFs that could be millionaire-makers.
1. Throw everything in the mix
It’s difficult to pick the stocks that are most likely to be long-term winners. The good news is that you don’t have to. With the Vanguard Total Stock Market Index Fund ETF (NYSEMKT: VTI), you’ll buy 3,747 U.S. stocks in one fell swoop.
Sometimes large-cap stocks perform best. Other times small-cap stocks perform best. Mid-cap stocks can also jump more than others at times. With VTI, you’ll own all of them. And you won’t pay outrageous fees along the way. This ETF’s annual expense ratio is only 0.03%.
The average annual return for VTI since its inception in May 2001 is 8.3%. If you invested $3,600 per year over a 40-year career and achieved that return less the ETF’s expenses, you’d have more than $1.08 million.
2. Go big
Warren Buffett’s Berkshire Hathaway portfolio owns only two ETFs. One of the two is the Vanguard S&P 500 ETF (NYSEMKT: VOO). Buffett even instructed in his will that 90% of the cash his family inherits be invested in a low-cost S&P 500 fund — and he recommended Vanguard’s.
As its name indicates, the Vanguard S&P 500 ETF tracks the S&P 500 index. This index includes the 500 largest U.S. companies. It’s weighted based on market cap, so the ETF invests more heavily in the biggest members of the S&P 500. Like VTI, VOO has a low annual expense ratio of 0.03%.
Since its inception in September 2010, the ETF has provided an average annual return of 13.91%. If you invested $3,600 per year over 40 years with that return less expenses, you’d wind up with over $5.3 million. It would only take an annual investment of $680 for your money to grow to $1 million.
Over the longer term, though, the average annual return of the S&P 500 index in its current form is 10.26%. With this average return minus expenses, you’d need to invest a little under $2,000 per year to become a millionaire.
3. Go big growth
Quite a few of the companies in the S&P 500 have mature businesses that aren’t growing rapidly. Wouldn’t it be nice to only invest in the large-cap U.S. companies that are delivering solid growth? With the Vanguard S&P 500 Growth Index Fund ETF (NYSEMKT: VOOG), you can.
This ETF currently owns 226 high-growth S&P 500 stocks. The average earnings growth of these stocks over the last five years is an impressive 20%. You’ll pay a little extra with this ETF compared to VTI and VOO, but its annual expense ratio is still relatively modest at 0.1%.
VOOG began trading in September 2010. Since then, it has delivered an average annual return of 15.13%. Investing $3,600 per year with that return minus expenses over 40 years would build your portfolio to a whopping $7.43 million. It would take less than $500 invested each year over the same period to make $1 million.
4. Think small
Another alternative to buying S&P 500 ETFs is to think small. Over the long run, small-cap stocks tend to outperform large-cap stocks. The Vanguard Small-Cap Index Fund ETF (NYSEMKT: VB) provides a great way to invest in small-cap stocks.
VB currently owns 1,422 U.S. stocks with relatively small market caps. Its annual expense ratio is 0.05%, well below the 1% average expense ratio for similar funds.
Since VB’s inception in January 2004, it has generated an average annual return of 8.85%. If you invested $3,600 per year over 40 years and obtained that return minus expenses, you’d have over $1.25 million. Over the longer term, though, small-cap stocks have generated average returns of close to 12%. You’d only need to invest roughly $1,200 annually over 40 years to become a millionaire with this return.
5. Think small and cheap
Arguably, the best approach for long-term investors is to think small and think cheap. Historically, small-cap value stocks have outperformed all other types of stocks. Vanguard has an offering to help you on this front, too, with the Vanguard Small-Cap Value Index Fund ETF (NYSEMKT: VBR).
VBR’s portfolio currently includes 856 stocks with relatively small market caps and attractive valuations. The average price-to-earnings (P/E) ratio of these stocks is 12.7 times, much lower than the S&P 500’s P/E ratio of close to 23 times. This ETF also has a modest annual expense ratio of 0.07%.
Vanguard created VBR in January 2004. Since then, the ETF has delivered an average annual return of 8.66%. You’d have a nest egg of over $1.18 million if you invested $3,600 per year over 40 years. Historically, small-cap value stocks have achieved average annual returns of a little over 14%. With that level of return, investing less than $700 per year over 40 years would grow your portfolio to over $1 million.
Can you really become a millionaire with these ETFs?
Yes, you could realistically become a millionaire by investing in these Vanguard ETFs over the long term. Granted, there’s no guarantee that the returns generated by these ETFs in the past will be achieved in the future. However, with enough money to invest regularly and enough time, a $1 million portfolio could very well be within your reach.
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Keith Speights has positions in Vanguard S&P 500 ETF and Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Small-Cap ETF, Vanguard Index Funds-Vanguard Total Stock Market ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
5 Vanguard ETFs That Could Be Millionaire-Makers was originally published by The Motley Fool
