History Says This S&P 500 ETF Could Turn $500 Per Month Into $1 Million

Key Points

• By adopting a simple dollar-cost averaging strategy, with a long time horizon, investors can reap impressive financial rewards in the stock market.

• The Vanguard S&P 500 ETF is a low-cost option that tracks the performance of the broader S&P 500.

• There are valid arguments for why the benchmark index can perform better or worse than it has in the past.

As investors, we all want to be smart and lucky enough to find a huge winner. For instance, imagine investing in Nvidia 10 years ago. Since then, the artificial intelligence (AI) stock has soared 30,380% (as of July 1).

However, investors should be aware that there are compelling passive vehicles to choose from. Exchange-traded funds (ETFs) can be a great choice for anyone's portfolio. And they provide exposure to different markets, indexes, or trends.

Even better, seemingly small sums can turn into large amounts of money. History says this S&P 500 ETF could turn $500 per month into $1 million. Here's what investors need to know.

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Looking at the past and future

The Vanguard S&P 500 ETF (NYSEMKT: VOO) is a fantastic choice. Investors instantly get diversified exposure to all 11 sectors of the economy. It has an extremely low expense ratio of 0.03%. Plus, it's offered by one of the most reputable companies in the asset management industry.

Over the past 30 years, the S&P 500 index has generated an annualized total return of 10%. Assuming that the same performance occurs over the next three decades (though there are no guarantees), a $500 monthly investment (for a total of 360 allocations) will turn into just over $1 million in 2055. If you can invest more money and extend your time horizon, the returns could be drastically better.

Investing in this fashion -- putting $500 to work per month -- is called dollar-cost averaging (DCA). The beauty of this strategy is that investors don't have to correctly time the market. It's almost like an automatic approach that buys on a consistent basis, regardless of what the market is doing. DCA helps investors build a habit of constantly investing.

The S&P 500 index contains 500 large and profitable U.S. companies. It's the most closely watched benchmark to assess how the stock market is performing. And based on the numbers mentioned, it looks like a wonderful choice. Investors are essentially betting on the track record of economic growth and innovation to continue, which has been a smart bet to make in the past.

Higher or lower

While the S&P 500's historical 10% annualized total return is a solid showing, investors should understand that the future is uncertain. Returns could be lower or higher over the next 30 years for a variety of reasons.

The case for why the future will be worse than the past comes down to a single variable: valuation. The CAPE ratio is a widely used measure of the S&P 500's valuation. It's currently at 36.1 and has only been higher on very few occasions since 1881. Data shows that forward returns are weaker when this multiple is elevated. This is precisely what supports the current bearish case for the market.

On the other hand, some factors can lead anyone to be bullish as we look ahead. The AI wave is on top of everyone's mind these days, with some researchers believing the technology could be a boon for economic growth.

There are also huge capital inflows into passive vehicles, which increases demand for stocks. And since the Great Recession about a decade and a half ago, there has been a significant expansion in the money supply, a trend that supports higher asset prices.

In my view, there are valid arguments to be made on both sides of the aisle here. However, I would default to thinking that it's a safe bet to assume the S&P 500 continues to produce a 10% annualized gain, in line with history. This still makes the Vanguard S&P 500 ETF a worthwhile investment to put $500 per month into.

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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Nvidia and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.