Is the Vanguard Information Technology ETF a millionaire?

Investing in exchange traded funds (ETFs) can be a fantastic way to build wealth with less effort than buying individual stocks.

An ETF is a basket of securities grouped into a single investment. Many funds contain hundreds of stocks, making it easier and more affordable to build a diversified portfolio. But not all ETFs are good investments, so it’s essential to choose wisely when deciding where to buy.

It’s possible to become a stock market millionaire with the right ETF, but there are some caveats. The Vanguard Information Technology ETF (VGT 0.64%) is a technology-focused fund with a history of earning above-average returns, but could it make you a millionaire? Here’s what you need to know.

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A strong performer

This ETF can be a fantastic option for those looking for a simpler way to gain exposure to the technology industry. Contains 320 technology stocks, including industry-leading machines Microsoft, Appleand Nvidia.

Those three stocks alone account for more than 47% of the fund’s total composition, so if you want to invest in the biggest tech players while maintaining more diversity than you would with individual stocks, this ETF could be a smart buy.

The Vanguard Information Technology ETF is also a strong fund with a history of outperforming the market. Over the past 10 years, it has earned an average rate of return of 20.63% per year.

For comparison, Vanguard S&P 500 ETF it achieved an average return of just 13.11% per annum during that period. Even stock-focused growth Vanguard Growth ETF it has achieved an average return of 15.33% per annum over the past decade. As far as growth ETFs go, the Information Technology ETF is one of Vanguard’s best-performing funds.

Achieving millionaire status

Given this ETF’s track record of earning higher-than-average returns, there’s a better chance you’ll be able to reach $1 million or more over time. However, there is one big caveat: this ETF is riskier than many others.

Growth funds, in general, are more volatile than broad market funds such as S&P 500 ETFs. The technology sector is often the hardest hit during periods of market turbulence, so you’ll likely see more ups and downs extreme downs with this fund than you would see with other ETFs.

Also, while the Vanguard Information Technology ETF has been able to beat the market by a substantial margin over the past decade, there are no guarantees that it will continue to do so over time. If you’re willing to take that risk for the chance of potentially higher returns, this fund might still be right for your portfolio.

How much you could earn will depend on how this ETF performs over time. Because technology-focused ETFs can be so volatile, it may be wise to consider multiple potential rates of return.

If you were to invest, say, $200 a month in this fund, here’s roughly how much you could earn over time, depending on whether you earn an average annual return of 20% (in line with this ETF’s 10-year average performance ), an average annual return of 15% or an average return of 11% (slightly higher than the long-term market average of 10% per year).

Data source: author’s calculations via investor.gov.

It is possible to make well over $1 million with this ETF, even though it earns lower returns compared to the recent 10-year average. Again, though, there’s always a chance of average or even below-average returns, so there are never any guarantees with this type of investment.

The right investment for you will depend on your goals and risk tolerance. Technology-focused ETFs like the Vanguard Information Technology ETF carry more risk than many other investments, but if you’re willing to take that risk, you could build a substantial amount of wealth over time.