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Can You Retire a Millionaire with ETFs Alone?

There is currently about $7 trillion invested in exchange-traded funds, or ETFs, in the U.S. -- that's up about 27% from the end of 2020, and it's more than seven times the total from just a decade ago in 2010. ETF assets have been growing at a roughly 25% annual rate over the past decade, and Bank of America released a study not too long ago that projected ETF assets will hit $50 trillion in the U.S. by 2030.

As assets have grown, so have the number of ETFs, as there are now over 2,600 different ETFs in the U.S. There are ETFs that invest in broad swaths of the market, as well as specific indexes, sectors, investment styles, or just about any segment of the market imaginable. 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 retire a millionaire with ETFs alone? Let's take a look.

Image source: Getty Images.

Building the perfect beast

As ETFs are baskets of stocks, like mutual funds, that trade on an 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 various risk profiles in between.

So, just as you would with a portfolio of stocks, a portfolio of ETFs would be diversified by risk profile to best navigate the markets ups and downs.

Let's say you invested a total of $20,000 in four ETFs, $5,000 in each. One might be a more aggressive growth ETF, like the Invesco QQQ (NASDAQ: QQQ), which invests in the stocks that make up the Nasdaq 100 Index. The Invesco QQQ is one of the largest ETFs on the market, with over $209 billion in assets. It invests in the 100 largest nonfinancial U.S. stocks, with about 70% in technology and communication services stocks. Over the last 10 years, through the third quarter of 2021, it has posted an annualized return of 22.4%. Since its inception in 1999, it has returned about 9.7% annually.

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

Now, let's provide some further diversification with an all-market ETF, like the Vanguard Total Stock Market ETF (NYSEMKT: VTI), which invests in pretty much the entire investable U.S. market of more than 4,000 stocks. This ETF has returned about 16.1% over the past 10 years on an annualized basis. Since 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 iShares Russell 2000 Growth ETF (NYSEMKT: IWO). This ETF invests in over 1,200 growth stocks from the small-cap Russell 2000 Index. Over the last 10 years through Sept. 30, this ETF has returned about 15.8% annually, and since inception in 2000 it has returned 6.9% on an annualized basis.

The long run

The past 10 years were particularly good for the stock market, as we had one of the longest bull markets in history. We can't really expect that type of performance again over the long run, but since all of these funds have long, 20-year-plus track records, let's take their returns since inception and extrapolate them out over the next 30 years.

If you started with $5,000 in 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 averaged a 9.7% return over the next 30 years, you'd have about $303,000, while the SPDR S&P 500 Trust would have roughly $349,000, with a 10.3% annualized return. The Vanguard Total Stock Market ETF, with its 9% return since inception, would accumulate about $257,000 after 30 years, while the iShares Russell 2000 Growth ETF would have about $159,000 over that period with its 6.9% annual return. If you add it all up, you'd have about $1.1 million after 30 years.

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

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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.


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