Getting by these days is difficult enough for most of us, what with needing to pay off a mortgage, automobiles, children’s educations, and everything else while attempting to stay employed during the deadliest epidemic in a century. Being a millionaire is probably the last thing on many people’s minds. That level of financial security could be obtained in retirement with wise, disciplined investing. You don’t need a large portfolio or the assistance of a broker. An exchange-traded fund (ETF), such as the Vanguard Extended Market Index ETF (NYSEMKT:VXF), can provide the diversification and return you require in a single investment. If you invest today in an all-cap fund and combine it with your 401(k) and Social Security, you might retire a millionaire.
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Long-term victor
Among the thousands of ETFs available, there are a number of excellent ones. However, there are a few reasons why the Vanguard Extended Market Index ETF is a smart long-term investment option. This is a fantastic pick if you’re the type of investor who wants just one more fund to set and forget, in addition to your employer-sponsored plan or individual retirement account.
It tracks the S&P Completion Index and holds virtually the entire stock market outside of the S&P 500. The S&P Completion Index contains nearly 3,000 stocks and provides exposure to all mid-, small-, and micro-cap stocks that are not included in the S&P 500.
The Vanguard Extended Market Index ETF owns 3,371 stocks with a median market capitalization of $7.1 billion. Square, Zoom, and Uber are the company’s largest interests, accounting for just over 1% of the portfolio.
Small- and mid-cap equities are normally more volatile than large-cap stocks in the near term, although small- and mid-caps have outperformed large-caps over time. During economic downturns, small- and mid-cap stocks often outperform, whereas large-cap stocks lead the way during bull markets.
The Vanguard Extended Market ETF has returned 11% since its debut on Dec. 27, 2001, through Feb. 28, 2021 — a period of approximately 20 years that includes a worldwide recession, a bull market, and a pandemic. The S&P 500 has returned nearly 8% annually during the same time span, which is a notable outperformance. This ETF also has a low expense ratio of 0.06 percent, which is significantly lower than the category average.
A self-made millionaire
While past performance is no guarantee of future results, let’s pretend that the Vanguard Extended Market ETF performs similarly in the next 20 years as it did in the previous 20. A $30,000 investment in this ETF with an annual return of 11%, compounded monthly at $200, would be worth $442,000 in 20 years. With a longer time horizon and a monthly contribution of $200, you would have more than $1.3 million if you held this ETF for 30 years at an annual return of 11%.
Of course, there’s no assurance that this ETF will yield 11% each year for the next 30 years, but even a 10% return would pay you $1 million after that time. The basic line is that the longer you have to make your money work, the better off you will be in the long term, no matter where you are on the road to retirement. And this ETF, in particular, is designed to deliver long-term results.
It’s hard to anticipate how the markets will perform in the next 20 or 30 years, but based on this ETF’s good performance over the last 20 years, you can rest assured that you’ll be well-diversified to weather the storm.
This post is the author’s own view, which may differ from a Motley Fool premium advice service’s “official” recommendation position. We’re a mishmash! Questioning an investing theory, even our own, encourages us to think critically about investing and make decisions that will make us smarter, happier, and wealthier.
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