Average ETF Return | How Much Will You Make?
Investing in ETFs is an excellent way to start making passive income on the stock market. However, you must research and discover the average ETF returns before you choose which fund to buy.
Becoming a successful ETF investor is more about research and patience than being good with numbers. Anybody can invest in ETFs, but you must do some research to determine your overall investment goals.
What is an ETF?
An ETF (exchange-traded fund) is a basket of stocks bundled into one fund. For example, rather than buying 500 different companies in your portfolio, you can purchase an S&P 500 ETF that will automatically expose you to the top 500 companies in the stock market.
The S&P 500 is rebalanced quarterly, which means bad stocks are removed from the index and replaced with better companies. Therefore, you won’t have to worry about staying up to date with stock news since the index automatically updates.
The convenience of an automatically updating portfolio is not free, though, as ETFs charge an expense ratio. The fees are automatically deducted from the fund's assets, so you won’t get a bill, but the costs compound and impact your total return.
What is the Average ETF Return?
The average ETF return will vary depending on each fund's strategy and goals. However, broad market ETFs generate an average return between 7-10%.
You can invest in ETFs that track specific types of stocks, such as high dividend-paying companies. Additionally, there are other ETFs that track specific sectors, like healthcare.
However, most investors choose to invest in the S&P 500 because it is the standard for stock investing and tracks the top 500 companies in the U.S. stock market.
How to Calculate the Average ETF Return
If you want to calculate the average ETF return of a specific fund, you can visit the fund’s website and look at the performance data.
For example, if you want to check the annual performance of Vanguard’s S&P 500 ETF VOO, you can go to its ETF page and scroll to performance and fees.
You can find plenty of historical data on the ETF page, allowing you to compare and contrast different funds to help you determine which is best for your portfolio.
Otherwise, you can calculate it manually with a drip calculator. Drip calculators are nice, but the most accurate data is typically found on the official ETF’s website.
You can input the symbol you want to analyze, which will bring up the average ETF return of the fund over the last ten years.
Average S&P 500 ETF Return
The average ETF return of an S&P 500 index is 11.82% since inception. The S&P 500 index is the benchmark for most ETFs, but various ETFs track different stocks and indices.
Therefore, ETFs that track different companies than the S&P 500 will have varying returns. The lowest-cost S&P 500 ETF is Vanguard’s fund with the ticker symbol VOO.
The expense ratio of VOO is just 0.03%, making it an excellent choice for investors looking to maximize their long-term returns. The expense ratio of an ETF may not sound like a big deal, but the fees compound over time, so you should pick the lowest-cost ETF.
Average ETF Return | How Much Will You Make?
The average ETF return on a percentage basis is 7-10%. However, the amount of money you make depends on how much you can invest.
For example, let’s assume you want to invest a lump sum of $10,000 into an S&P 500 ETF and will not touch it for the next decade.
It is impossible to predict the future. Therefore, we will use the previous ten years to determine how much money you would have made investing $10,000 ten years ago.
According to the VOO ETF performance page, investing $10,000 ten years ago gave you a cumulative return of 231.87%.
A return of 231.87% on an investment of $10,000 will leave you with a total of $23,187. Therefore, the total profit is $13,187 over ten years.
Investing in ETFs | Bottom Line
Average ETF returns vary, but on average, you should expect to generate an annualized return of 7-10% over a ten-year period.
Investors must also understand that ETFs will not always produce positive returns each year. The economy will naturally fall into bear markets and recessions, and your account may decrease in value during these times.
However, recessions are the best time to buy more ETF shares to maximize your long-term returns. Recessions are great for ETF investors because the price per share will decrease.
When the price of ETFs fall, your dollar will buy more shares, allowing you to pick them up at a discount. Additionally, dividend yields will rise as share prices fall, giving investors more bang for their buck.
- Josh
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Blog Post: #77
