This simple ETF could turn $200 a month into $530,806

Investing in the stock market can be as simple as buying an index fund, putting in a little money each month, and watching your nest egg grow. Thanks to the mathematical magic of compound interest, the early gains build a stronger foundation for future gains. The payoff can be staggering if you stick with this strategy for a few decades.

Read on to learn how a modest monthly investment can turn into half a million dollars in 30 years. You don’t even have to beat the market.

This is how a small investment can be increased over a long period of time

Let’s keep this thought experiment very, very simple.

The S&P500 (^GSPC 0.97%) The market index tracks the performance of the 500 largest American companies. The list is rebalanced twice a year, so the index remains reasonably up-to-date. Mutual funds and exchange-traded funds (ETFs) buy and sell stocks immediately after each rebalance announcement, keeping their investment portfolios equally up-to-date – with no additional effort for the fund’s shareholders.

So I expect the next 30 years on Wall Street to be about as productive, lucrative and wealth-creating as the last three decades. The S&P 500 posted a compound annual growth rate (CAGR) of 8.65% during that period, which began in 1994 and featured several market crises in between. The next 30-year period will undoubtedly be different in a thousand ways, but the long-term averages should be comparable enough.

The investment plan is also really simple. I start from scratch with a zero dollar portfolio. Every month this hypothetical investor invests $200 in a fund that tracks the S&P 500 index. It is not Nothing – perhaps comparable to a family’s cell phone bill or a nice night out on the town – but for many people, a pretty painless monthly amount. Imagine if the $200 contribution was an automatic part of your monthly paycheck.

Using a handy investment calculator and this data, I can show you the expected returns after 10, 20 and 30 years. The results might surprise you.

Expected returns

Data source: Investment calculator from NerdWallet.com.

These gains start slowly but then become rapid. You know the old saying about putting a grain of rice on the first square of a chessboard and doubling the pile of rice on each square? The first few grains might not impress anyone, but the last square would cover several years of world rice production.

That’s the power of exponential returns, and that’s exactly what I mean in the index fund investing example. Even a modest annual return like the long-term market average of 8.65% adds up to incredible returns over the long term.

Wait a minute – didn’t the headline say something about half a million dollars?

Okay, you caught me. You might have noticed a higher price target in the headline.

I just want to show you what a difference a few percentage points more can make when you multiply returns by several decades. And you know, it’s quite easy to achieve that increase.

All you need to do is set up your brokerage account to reinvest the dividends from this fund to buy more shares over time. With this dividend reinvestment plan activated, the S&P 500’s total returns have historically averaged 10.7% annual growth rate. So what happens when I add this dividend-driven accelerator to this exercise?

Well, the total returns for the entire three decades are miles above the pure price gains:

Data source: Investment calculator from NerdWallet.com.

And there’s the half-million target I talked about in the headline. You’re still not beating the market here, but you’re matching the gains of the most popular market index with a small (but game-changing) boost from reinvested dividends.

Why Vanguard’s S&P 500 ETF stands out

There are only three ETFs that directly track the S&P 500 index. Each of them should, by my calculations, produce results very close to the S&P 500 averages, but I have a favorite among them.

The Vanguard S&P 500 ETF (VOO 0.96%) is a no-frills index tracker with minimal annual fees and is managed by the venerable Vanguard family of funds.

In the words of master investor Warren Buffett, Vanguard founder Jack Bogle “has probably done more for the American investor than any other man in the country.” This patient genius of index investing has started a movement, and his company should remain true to this investment philosophy for the foreseeable future.

That’s why I prefer Vanguard funds over other fund managers. SPDR S&P 500 ETF Trust (SPY 0.96%) and the iShares Core S&P 500 ETF (IVV 0.93%) aren’t far behind, and a few index funds are worth considering as well. But this is the S&P 500 index fund that I prefer for my own portfolio, and Warren Buffett likes it too.

There you have it. This Vanguard ETF is everything you need to build a game-changing nest egg over a couple of decades. Just stick with your monthly investing process and watch the returns add up over the years. It’s a pretty awesome experience.