Can you withdraw a millionaire with ETFs alone?

There is currently about $ 7 trillion invested in exchange-traded funds, or ETFs, in the United States – that’s about 27% more than at the end of 2020, and that’s more than seven times the total of just ten years ago in 2010. ETF assets have grown at an annual rate of around 25% over the past decade, and Bank of America not too long ago published a study that estimated ETF assets in the United States to reach $ 50 trillion by 2030.

As assets have grown, so has the number of ETFs, as there are now over 2,600 different ETFs in the United States. imaginable market segment. There are also a growing number of actively managed ETFs, as well as custom ETFs that invest in multiple exchanges or benchmarks.

With so many options available, is it possible to withdraw a millionaire with ETFs alone? We will take a look.

Image source: Getty Images.

Building the perfect beast

Since ETFs are baskets of stocks, like mutual funds, that trade on the stock exchange like an individual stock, they are already diversified to some extent. But with so many options, you can get ETFs that range from very aggressive on one end of the spectrum to ultra-conservative on the other end, with varying risk profiles in between.

So, just like you would with an equity portfolio, an ETF portfolio would be diversified by risk profile to better navigate the ups and downs of the markets.

Let’s say you invested a total of $ 20,000 in four ETFs, $ 5,000 in each. One could be a more aggressive growth ETF, like the Invesco QQQ (NASDAQ: QQQ), which invests in the stocks that make up the Nasdaq 100 index. Invesco QQQ is one of the largest ETFs on the market, with more than $ 209 billion in assets. It invests in the 100 largest US non-financial stocks, with around 70% in communications technology and services stocks. Over the past 10 years, up to the third quarter of 2021, it has posted an annualized return of 22.4%. Since its inception in 1999, it has brought in around 9.7% per year.

Another could be a large cap ETF, invested in the S&P 500, like the SPDR S&P 500 Trust (NYSEMKT: SPY). This ETF has returned around 16.5% in the last decade through September 30, and since its inception in 1993, it has an annualized return of 10.3%.

Now, let’s provide additional diversification with an all-market ETF, like the Vanguard Total Stock Market ETF (NYSEMKT: VTI), which invests in almost the entire investable US market of more than 4,000 stocks. This ETF has returned around 16.1% over the past 10 years on an annualized basis. Since its inception in 2001, it has returned 9% on an annualized basis.

Finally, the fourth ETF in the portfolio could be a small cap ETF, like the Russell 2000 iShares Growth ETF (NYSEMKT: IWO). This ETF invests in over 1,200 growth stocks of the Russell 2000 Small Cap Index. For the last 10 years through September 30, this ETF has returned around 15.8% per annum, and since its inception in 2000, it has returned 6.9% on an annualized basis.

The long term

The past 10 years have been particularly good for the stock market as we have had one of the longest bull markets in history. We can’t really expect this type of long-term performance, but since all of these funds have a track record of over 20 years, let’s take their returns since inception and extrapolate them over the next 30 years.

If you had started with $ 5,000 each, invested $ 100 per month, and calculated their growth with their returns since inception, how much would you have accumulated in 30 years?

If the Invesco QQQ had an average return of 9.7% over the next 30 years, you would have approximately $ 303,000, while the SPDR S&P 500 Trust would have approximately $ 349,000, with an annualized return of 10.3% . The Vanguard Total Stock Market ETF, with a return of 9% since inception, would accumulate around $ 257,000 after 30 years, while the iShares Russell 2000 Growth ETF would have around $ 159,000 over this period with an annual return of 6 , 9%. If you add all that up, you would have about $ 1.1 million after 30 years.

This is purely hypothetical, as it is impossible to know what the market will do in the long run. But we to do knowing the S&P 500, has reported about 10% per year, on average, since its inception in 1957. It also assumes that this is your only retirement vehicle. If you have an employer-sponsored plan, you may not be able to contribute $ 100 per month to each, but you may be able to contribute $ 50 per month. The amount you accumulate may not be $ 1 million, but added to your other investments, investing in ETFs would definitely help you hit that plateau. The key is patience and commitment – and it will lead to results.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Jimmie T.

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