These 2 Simple ETFs Could Turn $500 a Month Into $1 Million. | The Motley Fool (2024)

Everyone would like to have $1 million. However, earning that much money is far easier said than done.

Yet it can be done. Anyone can build a fantastic nest egg with the right strategy, discipline, and investments.

So let's dive into how to do it with only $500 per month.

The power of compounding

Compound interest is one of the most powerful concepts in finance for a good reason. Here's a simple example that shows why:

Imagine you have $1. Not much, right? But imagine that you had a special vault you could put it inside that would double it after 24 hours. After one day, your vault would contain $2 -- still, nothing special. Even after one week, you'd only have $128.

Yet the pace would quicken considerably over the next week. After 14 days, you'd have $16,384, and from there, it would only take another six days to reach $1 million.

Now, needless to say, doubling your investment every single day is not a realistic real-world expectation. However, this example does show how powerful compound interest can be. Indeed, by using a more realistic example, it's easy to see why it's so important to save and invest.

Let's imagine someone who could save $500 a month. That adds up to $6,000 per year, or $60,000 over the course of a decade. If that individual could grow their $60,000 investment portfolio at a compound annual return (CAGR) of 15% over the next 20 years, they would reach $1 million during their 20th year of investing.

That's great news, because many simple, low-cost exchange-traded funds (ETFs) have generated approximately 15% annual returns.

Let's examine two of them more closely to see how they could help turn $500 per month into $1 million.

2 great ETF options to reach $1 million

First up is the Vanguard S&P 500 Growth ETF (VOOG 0.38%). This fund is focused on growth stocks within the S&P 500 index, which is excellent for investors seeking capital appreciation rather than dividend income. By concentrating on companies with high growth potential, the fund takes on additional risk but produces higher returns over the long run, which is another benefit for long-term, buy-and-hold investors.

The fund's top holdings are concentrated in tech megacaps like Microsoft, Apple, and Nvidia. However, there are also sizable positions in stocks outside the tech sector such as Eli Lilly and Mastercard.

Best of all, for investors who want to reach $1 million, this fund has generated a 15.7% CAGR since its inception 13 years ago. That's a pace slightly ahead of the example given earlier.

While the Vanguard ETF is a wonderful option, it's worth exploring an example of an ETF with a 20-year history to see how $60,000 really can grow to $1 million -- or very close to it -- using a well-known, simple, low-cost ETF.

So let's look at the Invesco QQQ Trust Series I (QQQ 0.45%).

This ETF tracks the NASDAQ 100 index, which is a basket of stocks that trade on the Nasdaq stock exchange. There are no financial companies in the index, and it skews heavily to the tech sector. Top holdings include tech megacaps like Microsoft, Apple, Nvidia, Amazon, and Alphabet, although the current concentration in those stocks is less than the Vanguard ETF noted earlier.

Crucially, however, this ETF has a history stretching back more than 20 years, so it's easy to see how a $60,000 investment has fared over the course of two decades.

QQQ Total Return Level data by YCharts.

As you can see, a $60,000 investment made in mid-2004 would have grown to $879,000 today. What's more, that's not the all-time high. Only a few weeks ago, the total would have been $955,000. The reason the fund comes up slightly under $1 million is that its CAGR over the last 20 years is just under 15% -- 14.3% to be exact.

Nevertheless, this strategy of turning $500 per month into $1 million remains sound -- thanks to the power of compounding.