When it comes to making money in the stock market, where you choose to buy will make or break your earnings potential.
Investing in exchange-traded funds (ETFs) can be a powerful way to build wealth with less effort than buying individual stocks. Each ETF contains dozens or hundreds of stocks, bundled together into a single investment. By investing in just one share of an ETF, you can build a well-diversified portfolio with a fraction of the effort.
Growth ETFs, in particular, are designed to beat the market over time, as each fund contains stocks with the potential for above-average returns. While there are many growth ETFs to choose from, there's one I've owned for years and plan to continue buying for as long as possible: The Vanguard Growth ETF (VUG 0.34%).
Vanguard Growth ETF: The strengths
The Vanguard Growth ETF contains just under 200 stocks from multiple industries, though around 56% of the fund is allocated to stocks in the tech sector.
While the high percentage of tech stocks can increase your risk (since tech is generally more volatile than many other industries), this fund still offers plenty of diversification with stocks from nearly a dozen different sectors.
This ETF also aims to balance risk and reward with its selection of blue chip stocks and smaller growth companies. The fund's top 10 holdings make up around half of its overall composition, and these stocks are from industry-leading juggernauts like Apple, Amazon, Microsoft, and Nvidia. The rest of the stocks come from smaller corporations with more potential for growth.
Balancing behemoth stocks with up-and-coming growth companies can help maximize your potential earnings while limiting risk. The bigger stocks are less likely to see explosive growth, but they're also generally safer than up-and-coming stocks. Smaller companies carry more risk, yet if any one of them turns into a superstar performer, you could see substantial returns.
One potential weakness to consider
Like all growth ETFs, this fund carries more risk than many other investments, particularly broad-market funds like an S&P 500 ETF or total market ETF.
Growth stocks, in general, are more volatile than their more established counterparts. They often thrive when the market is surging, earning well-above-average returns. But when the market is volatile, they tend to be hit harder than more established stocks.
If you're considering investing in any growth ETF, be sure you're willing to take on slightly higher levels of risk. While investing in ETFs can be less risky than buying individual stocks, growth funds are still more volatile than broad-market funds and many other types of ETFs.
How much could you earn with this ETF?
Past performance doesn't predict future returns, so it's impossible to say exactly how the Vanguard Growth ETF will perform over time. However, it can be helpful to look at its historical returns to see what type of future earnings may be possible.
Over the past 10 years, this ETF has earned an average rate of return of 15.07% per year. If we look back to its inception in 2004, though, that average return drops to 11.18% per year -- which is still higher than the market's historic average of around 10% per year.
Because growth ETFs can be more volatile and unpredictable than broad-market funds, let's assume your investment could earn either an 11%, 13%, or 15% average annual return going forward. If you were to invest, say, $200 per month, here's approximately how that would add up in each situation:
| Number of Years | Total Portfolio Value: 11% Avg. Annual Return | Total Portfolio Value: 13% Avg. Annual Return | Total Portfolio Value: 15% Avg. Annual Return |
|---|---|---|---|
| 20 | $154,000 | $194,000 | $246,000 |
| 25 | $275,000 | $373,000 | $511,000 |
| 30 | $478,000 | $704,000 | $1,043,000 |
| 35 | $820,000 | $1,312,000 | $2,115,000 |
Data source: Author's calculations via investor.gov.
There are no guarantees that this ETF will see these types of returns going forward, and there's a chance it may not beat the market at all. But if you're willing to take that risk for the possibility of earning higher-than-average returns, you could potentially make a lot of money over time.
The Vanguard Growth ETF is a powerhouse investment that aims to balance risk and reward, and it has a strong track record of beating the market over time. If you're comfortable with higher levels of volatility in exchange for potentially higher returns, this ETF could be a fantastic fit for your portfolio.
