Although here at The Motley Fool we talk a lot about individual stocks, exchange-traded funds are a perfectly legitimate alternative to reaching your financial goals.
In fact, ploughing all your money into just three of them could provide enough diversification and returns to take you to a comfortable retirement.
Let’s take a look:
This trio of funds seem to perform satisfactorily
Three of the sturdiest ETFs I have come across are:
- Vaneck Morningstar Wide Moat Etf (ASX: MOAT)
- Betashares Nasdaq 100 ETF (ASX: NDQ)
- Vanguard Australian Shares High Yield Etf (ASX: VHY)
The Vaneck Wide Moat invests in a diversified set of US stocks with “sustainable competitive advantages” as determined by Morningstar research.
A moat can become wide because the product a company makes is unique, or the service it provides might have a high barrier to entry.
While the past is never an indicator of future performance, the Vaneck Wide Moat has, admirably, almost doubled its share price over the past five years.
The Betashares NASDAQ 100 fund is exactly what it says on the label.
As the NASDAQ stock exchange is dominated by technology companies, one can consider it a proxy for the biggest US growth stocks.
Despite all the ups and downs growth shares have seen through COVID and interest rate rises, the share price for the ETF has more than doubled over the past five years.
Nice.
Finally, for some local flavour, I like the look of the Vanguard Australian Shares High Yield fund.
One of the biggest advantages of the ASX is that it’s packed with dividend-producing stocks. And this ETF especially hunts down the ones that will provide high sustainable income by tracking the FTSE Australia High Dividend Yield Index (FTSE: GPVAN013).
According to Vanguard, the dividend yield stands at a respectable 5.8%. The capital has been decently protected too, with the share price growing 13.2% over the past five years.
The strategy to get to a million bucks
So how do we grow our money into a millionaire nest egg?
Let’s say both Vaneck Wide Moat and Betashares NASDAQ 100 can achieve 14.87% growth per annum, which is the rate to double every five years.
Then let’s assume the Vanguard Australian Shares High Yield can grow capital at 2.47% per annum plus yield 5.8% that’s immediately reinvested. This is a total return of 8.27% per annum.
If we invest equally into these three funds, the average return works out to be 12.67%.
Now imagine you are a 30-year-old who has saved up $21,000 to invest.
You put $7,000 each into these three ETFs, then deposit a further $70 into each fund every month.
According to the government’s Money Smart calculator, that investment, at an annual growth rate of 12.67%, will hit the $1,000,000 mark after 27 years.
At the age of 57, you will be able to retire early as a millionaire.
What if you’re starting your investment journey a little later in life?
If you’re a 40-year-old starting with a $90,000 lump sum who can add a further $110 into each fund every month, you can retire just as well as that 30-year-old.
The Money Smart calculator shows that investment will take 18 years to turn into a million.
So that investor, despite starting ten years later, can also retire early with seven figures to their name.
