This 1 simple ETF could turn $500 a month into $500,000

Anyone can turn $500 into $500,000 — if you have the time and patience.

Don’t you think so? Read on to discover the secrets of how consistent savings and long-term stock returns can add up to half a million dollars.

Image source: Getty Images.

getting started

First things first: In order to raise an egg, you have to save. So let’s imagine a hypothetical investor who is able to save $500 per month.

Next, let’s imagine a base case where our hypothetical investor poured that $500 per month into a five-year certificate of deposit (CD) paying 5% annually. Additionally, let’s also assume that our hypothetical investor could roll his nest egg every five years into a new CD at the same 5% annual rate.

Calculations by author.

As you can see, after five years, our investor will have grown to nearly $34,000. In 10 years, it would be worth more than $77,000. And in 25 years, their nest egg will have grown to nearly $300,000.

Not bad. But the stock market can put those 5% annual returns to shame. Here’s how.

How to use a core index fund to grow a nest egg

Let’s start by identifying a simple, well-known index-traded fund. I like it Invesco QQQ Trust (QQQ -0.19%). It is full of technology stocks such as Microsoft, Apple and Nvidia. It also provides some diversification. Has holdings in PepsiCo, Amgen, Costco Wholesale, Starbucksand CSXto name just a few.

In any case, what is of particular interest is the fund’s annual returns. Because over the past 10 years, this fund has generated a compound annual growth rate (CAGR) of 17.2%.

QQQ Total Return Level data by YCharts

Agreedthe last 10 years have been excellent for the stock market — and especially for tech stocks. So if we extend the performance window back to 1999, giving us 25 years of data, the fund’s CAGR drops to 9.1%.

QQQ Total Return Level data by YCharts

To be conservative, let’s use this lower 9.1% CAGR and see how 25 years of investing could help our hypothetical investor turn $500 into $500,000.

How they measure stock market returns

Applying a CAGR of 9.1% to the nest egg, we start to see how apparently small the change in annual yield can really increase the return on investment.

Calculations by author.

At first, the difference is small — almost imperceptible. After five years, the investment only generated about $3,500 more.

However, after 10 years, the difference is more obvious. By then, there’s almost a $20,000 difference between the two nest eggs.

By year 20, make no mistake — a higher annual return changes everything. After 25 years, the investment is 83% higher than the money market.

In short, the core index fund outperformed CDs by nearly $250,000. But that’s not all. Remember, in this scenario, we used a very conservative growth rate for the index (9.2%). I also used a very optimistic interest rate for CDs (5%). In many time periods, the stock market has outperformed CDs by an even greater margin.

That’s why investing in a simple index-tracking ETF is one of the best ways to grow wealth. And it’s a way to turn $500 a month into $500,000.