One of the best things about index exchange-traded funds (ETFs) is the lack of ongoing effort they require as part of a share portfolio. When you invest in an individual company, there are annual reports to read, market updates to follow, and valuations to get right. Having 10 or 20 shares in a portfolio can thus be a lot of work.
But index ETFs are a different kettle of fish. An index ETF is designed to track an index over time. Both the fund and the index are automatically and periodically rebalanced. This ensures that only the correct shares by market capitalisation are represented.
As such, an index fund is an investment you can comfortably leave in your proverbial bottom drawer and never look at again.
The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a perfect example. This ETF tracks the MSCI World ex-Australia Index. This follows a portfolio of the world's largest companies across the advanced economies of the world.
US tech giants like Apple and Amazon.com dominate its top holdings, but everything from Exxon Mobil and Nestle to AstraZeneca and Disney is in this ETF.
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How long would it take for this ETF to turn $200 a month into $250,000?
So how could this ETF turn a $200 per month investment into $250,000? Well, let's start with its performance history. Since its inception in 2014, the Vanguard International Shares ETF has returned an average of 11.39% per annum.
If we use that figure as a benchmark, we can accurately predict how long it will take depositing $200 a month to reach a total sum of $250,000.
So assuming an investor puts in $200 a month, the ETF maintains a long-term average return of 11.39% per annum (not at all guaranteed) and reinvests all dividend distributions, they will hit a $250,000 balance in just over 22 years. All requiring very little work… albeit a lot of time.
After 25 years, that investor would have a total of $340,848, and after 30 years, $616,836. Such is the miracle of compound interest.
