ETFs seem to be all the rage nowadays with more and more people leaving actively managed mutual funds for the, usually, passively managed ETFs.
And it’s no wonder. They combine the diversification of mutual funds with the easy and instant transactions you get with regular stocks. And they come in so many different styles and flavors you’ll probably have a hard time picking one.
But the big question remains: Can ETFs make you rich? And how would it take?
These are some of the questions we will look at in this article, with a realistic viewpoint, not an overly pessimistic or rosy one.
We will also look at some different types of ETFs and how they could be used to build wealth.
If you don’t feel like reading the whole article, there’s a table at the bottom that shows you how long it will take for your investments to reach $1 million based on how much you invest monthly and at what annual return.
Can You Get Rich Off ETFs?
It’s a difficult question to answer and the boring but realistic answer is: it depends.
Among other things, it depends on what your definition of rich is, where you live, how much you will invest. It also depends on things out of your control, like what the future holds.
And since we have no way of knowing, in this article we’ll assume that the future will be kind of like the past.
Before we begin, in this article we’ll use the U.S. median personal disposable income of $34,514 and the average monthly savings of around 7.5% (in recent years) to get an average of $200 per month that could be invested. Of course, you could do better or worse than that, and as I said, there is a table at the bottom you can look at.
So let’s get into it. We’ll start by looking at some different types of ETFs and how they could be used to build wealth.
Equity ETFs are the most common type of ETF, they mostly contain stocks. A big portion of these are index funds, but some are actively managed.
There are plenty of index funds to choose from but the most popular one must be the S&P 500, so that’s the one we’ll look at.
The S&P 500 has had an average annual return of 10% since its inception, dividends included. So, if we assume that it will continue as it has, can it, realistically, make you rich?
Again, “rich” is subjective, but let’s look at how long it would take to amass $1,000,000 with the average of $200 per month invested at the S&P 500’s average annual return of 10%.
With $200 invested per month and compounded by 10% per year, it would take 31 years to reach $500,000, 38 years to reach $1,000,000, and 46 years to reach $2,000,000.
So, for some people, the answer is yes. You could get rich off ETFs. It would take time and you would have to leave your investments alone without touching them. But it is possible.
Some people will require more to be rich than others, though. So what if you invested $500 per month and got a 14% return by continually picking the right ETFs, how long would it take to reach a million?
About 23 years. 28 for $2,000,000, and 41 for $10,000,000. That is the power of compounding, it only ramps up with time. Here is an article on how you could use the effect with ETFs and index funds. Now, let’s continue by looking at bond ETFs.
Bond ETFs contain, you guessed it, bonds. There are many different kinds of bond ETFs and they usually yield anything from 1-2% for the safe ones and up to 6-8% for the high-yielding junk bond ETFs.
As in most cases when it comes to the stock market, it’s a question about risk vs. return. How much risk you’re willing to take on is up to you.
So, again let’s look at how long it would take to make a million dollars. This time you’re investing $200 monthly in a bond ETF yielding 1-2%.
With a 1% yield, it will take 164 years, and with 2%, 112. And if inflation continues as it has, that $1,000,000 wouldn’t be worth anything near what it’s worth today. So in other words, it’s not a realistic way to get rich.
But what about investing in the high-yielding bond ETFs? With a 6% yield, it will take 55 years, 49 for 7%, and 45 for 8%. If you consider a million dollars to be rich, then it is possible, but with the higher risk you’re taking with junk bonds, you could argue that investing in stocks is probably a better option.
How Long Would it Take to Get Rich Off ETFs?
It depends on the returns you’re able to achieve, but also on how much you invest. In other words, it’s all up to you, like always.
Below is a table that shows you how long it would take you to make $1,000,000 based on how much you invest and at what rate.
|3%||132 Years||110 Years||87 |
|66 Years||49 Years||42 Years|
|4%||106 Years||89 Years||72 |
|56 Years||42 Years||37 Years|
|5%||90 Years||76 Years||62 |
|49 Years||38 Years||33 Years|
|6%||78 Years||66 Years||55 |
|44 Years||34 Years||30 Years|
|7%||70 Years||59 Years||49 |
|40 Years||31 Years||28 Years|
|8%||63 Years||54 Years||45 |
|36 Years||29 Years||26 Years|
|9%||57 Years||49 Years||41 |
|34 Years||27 Years||24 Years|
|10% (Historical Average S&P 500 Return)||53 Years||46 Years||38 |
|31 Years||25 Years||22 Years|
|11%||49 Years||42 Years||36 |
|29 Years||24 Years||21 Years|
|12%||46 Years||40 Years||34 |
|28 Years||23 Years||20 Years|
|13%||43 Years||38 Years||32 |
|26 Years||22 Years||19 Years|
|14%||41 Years||36 Years||30 |
|25 Years||21 Years||18 Years|
|15%||39 Years||34 Years||29 |
|24 Years||20 Years||17 Years|
|16%||37 Years||32 Years||28 |
|23 Years||19 Years||17 Years|
|17%||35 Years||30 Years||26 |
|22 Years||18 Years||16 Years|
|18%||33 Years||29 Years||25 |
|21 Years||17 Years||16 Years|
|19%||32 Years||28 Years||24 |
|20 Years||16 Years||15 Years|
|20%||31 Years||27 Years||23 |
|19 Years||16 Years||15 Years|
Can ETFs make you rich? Probably. Are there better ways? Probably.
When investing in ETFs to get rich, your best bet is probably index funds and a lot of patience. To speed things up, you could try picking attractive sector ETFs, but be aware of the fact that you also run the risk of losing money instead.
Bonds are very limited in their use as long-term investments. The safe ones will have inflation breathing down their necks, if they can even keep up, that is. The risky ones are, well, risky.
On a final note, if you’re really into investing and willing to learn, then picking individual stocks is probably your best option. But that is only if you’re willing to learn and treat your investment activities as an enterprise in itself. If you want to learn more about whether you should stick to index funds or pick your own stocks, here is an article. Good luck!