The right investment can limit risk while still growing your money substantially.
Investing in the stock market can be intimidating, especially during periods of volatility. But it's also one of the most effective ways to build wealth, and you don't need to be an expert to earn a lot of money over time.
Exchange-traded funds (ETFs) are one of the safer types of investments out there, as they require less effort than investing in individual stocks while also increasing diversification. An ETF is a collection of stocks bundled together into a single fund, so by investing in just one share of an ETF, you'll instantly own a stake in hundreds or even thousands of stocks.
Not all ETFs are created equal, however, and some are safer investments than others. If you're looking to minimize your risk in the stock market while still investing in stocks, these ETFs could be a good fit for your portfolio.
Minimizing risk with broad-market funds
A broad-market ETF is a fund that contains a wide variety of stocks and aims to track large indexes -- or even the market itself.
For example, an S&P 500 ETF tracks the and includes all the stocks within the index itself. If you're looking for even more diversity, a total market ETF aims to replicate the performance of the entire stock market.
Image source: Getty Images.
The biggest advantage of a broad-market fund is the diversification. An S&P 500 ETF, for example, contains stocks from 500 of the largest companies in the U.S., while a total stock market ETF can include thousands of stocks ranging from smaller corporations to industry-leading juggernauts.
In general, the more variety you have in your portfolio, the lower your risk. The market is always subject to volatility, especially in the short term. If you're investing in hundreds or even thousands of stocks, a few bad performers won't sink your entire portfolio.
While there are countless ETFs to choose from, a few of the most popular broad-market ETFs include:
- SPDR S&P 500 ETF Trust (SPY -0.12%)
- Vanguard S&P 500 ETF (VOO -0.13%)
- iShares Core S&P 500 ETF (IVV -0.13%)
- Vanguard Total Stock Market ETF (VTI -0.19%)
- Schwab U.S. Broad Market ETF (SCHB -0.21%)
- iShares Core S&P Total U.S. Stock Market ETF (ITOT -0.26%)
All of these funds track either the S&P 500 or the total market, and they also offer low expense ratios -- all have an expense ratio of 0.03% except for SPY, which has a 0.0945% expense ratio. In other words, these ETFs charge fees of $3 or $9.45 per year for every $10,000 in your account. With many funds charging 1% or more in fees, a low expense ratio could save you thousands of dollars in fees over time.
Another advantage of broad-market funds is that they're more likely to recover from downturns. The market itself has faced countless crashes, bear markets, recessions, and corrections over the decades. Yet it's managed to not only recover from them all, but go on to see positive total returns.
By investing in an ETF that tracks the broader market, it's incredibly likely your investment will recover from whatever volatility the market may face going forward.
How much can you earn with these ETFs?
Exactly how much you earn will depend on where you invest, as well as how the market performs over time. While past performance doesn't predict future returns, it can sometimes be helpful to look at the market's history to get an idea of where it might be headed going forward.
Historically, the market itself has earned an average rate of return of around 10% per year, meaning the annual highs and lows have averaged out to around 10% per year over several decades. If you're investing in a broad-market fund, there's a good chance your investment may earn similar returns over the long haul.
Say, for example, you're investing $200 per month in a broad-market fund earning a 10% average annual return. Depending on how many years you have to save, here's approximately how much you could accumulate:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: Author's calculations via investor.gov.
Again, the actual returns you experience will depend on your investment and the market's future performance, but it's possible to earn hundreds of thousands of dollars (or even $1 million or more) with broad-market ETFs.
ETFs can be fantastic low-maintenance investments, and broad-market funds, in particular, are a safer and more reliable option. By investing consistently and keeping a long-term outlook, you can protect your money while earning more than you might think.
Katie Brockman has positions in Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
