Is the Vanguard Total Stock Market ETF a Millionaire Maker? | The Motley Fool (2024)

Are you dreaming of becoming a self-made millionaire, but you aren't a professional-level athlete or artist, and your salary is just average? You're not alone.

Fortunately, even without any particular sought-after skills or an extraordinary income, it's still possible for you to invest your way to millionaire status. Doing so won't take up much of your time either. Heck, you're likely better served by spending less time on the effort than most people do. A single investment could do the job, in fact. The key is just making the most of the money you can come up with, which often means leaving it alone even when it doesn't feel right to do so.

One investment that checks off all the boxes is the Vanguard Total Stock Market ETF (VTI -0.09%), which -- just as the name suggests -- is an investment in the performance of the overall stock market.

Less is more, and simpler is better

Relatively new investors may disagree with the idea. Picking winning stocks and avoiding the wrong ones seems like the key to it all. The financial media and brokerage industry also have something of a penchant for encouraging trading activity. It's easy to be lured into "performance chasing."

That's not how most investors make most of their money in the end though. You're actually better off in the long run buying and holding quality stocks for as long as you possibly can, even when doing so becomes a bit uncomfortable.

But which stocks? That's just it -- it doesn't entirely matter. Assuming you pick a sufficiently diversified handful of quality names, you'll probably do well enough in the long run with a simple buy-and-hold approach. Indeed, you'll likely do better than most active investors.

Don't believe it? Consider this. Data compiled by Standard & Poor's indicates that over the course of the past five years, nearly 79% of large-cap mutual funds available to investors in the United States underperformed the S&P 500 (^GSPC -0.02%). If you stretch the timeframe out to 15 years, 88% of these funds failed to keep up with their benchmark comparisons. Meanwhile, Goldman Sachs reports most hedge funds also underperformed the overall market last year (again) with several losing money despite the broad market's gains.

Soak that in for a moment. The majority of these well-paid and well-equipped fund managers not only didn't add value, they ultimately cost their clients money by virtue of underperforming other investments they could have just as easily owned.

Take the hint. If these pros struggle to beat the market, perhaps amateurs shouldn't be trying so hard to do the same.

The question remains, however: Is the Vanguard Total Stock Market ETF a millionaire-maker kind of pick?

Putting the Vanguard Total Stock Market ETF to the test

The question actually misses a key point of the matter: How much money are you working with right now, and how much more will you be adding to the effort in the future?

But first things first: Let's at least begin answering the overarching question by acknowledging -- from an odds-making perspective -- that your best bet is a broad-based index fund like the Vanguard Total Stock Market ETF. When you own a stake in the exchange-traded fund you own a cap-weighted piece of the United States' 3,700 or so exchange-listed equities. It's guaranteed to keep pace with the overall stock market because it is the market. The fund's expense ratio is also next to nothing at 0.03%, meaning Vanguard's compensation for managing the ETF takes a negligible toll on your net return.

More importantly, this fund delivers the returns you'd expect a total stock market fund to offer. Its average annual return for the past 10 years is 12.2%, according to numbers from Morningstar, and that figure is up to 14.4% for the past 15 years.

Just for the sake of being conservative, though, let's assume the lower number of these two is the reproducible norm. How would that get a newcomer to the million-dollar mark? It depends. If you've got 30 years to work with, investing $300 per month ($3,600 per year) in the ETF would do the trick. Many of us may not have 30 years before we'll need to tap into this nest egg, however. If you've only got 20 years to go, you'll need to allocate a hefty $1,000 per month (or $12,000 per year) to this pick. And if you've only got a decade to work with ... well, that's going to require $4,500 per month, or $54,000 per year.

Obviously, a great deal of this compounded growth comes during the latter portion of the timeframe in question. That's why it pays so handsomely to start as early as you can.

Steady contributions over time aren't the only way to grow a seven-figure stash, of course. Assuming this Vanguard ETF continues performing the way it has since its inception in 2001, a $27,000 investment in it today could be worth $1 million in 30 years. If you need a million bucks in 15 years, though, it's probably going to require a $170,000 investment in the ETF right away.

It's less about the ETF and more about you

Past performance is no guarantee of future results, of course. Something could change to crimp this ETF's future returns.

It's also worth pointing out that alternatives such as the SPDR S&P 500 ETF Trust (SPY -0.00%) and the Invesco QQQ Trust (QQQ -0.04%) may offer similar results. The Vanguard Total Stock Market ETF is a compelling choice just because it boasts a slightly stronger long-term track record than the S&P 500, perhaps because it's exposed to faster-growing mid-caps and small-caps. The Vanguard fund also generally lags behind the performance of the Invesco QQQ Trust though.

The thing is, most index funds are in the same basic ballpark in terms of long-term performance. This one is no exception.

So the bigger takeaway is that a particular ETF's millionaire-making potential has less to do with that fund, and more to do with what you do with it. The Invesco QQQ Trust and the SPDR S&P 500 ETF Trust are also millionaire-maker ETFs if you're able to commit enough money to them and then -- most importantly -- leave 'em alone for years on end. Let time do the heavy lifting, no matter which ETF you choose.