History Says This ETF Could Turn $100 per Month Into $167,690 in 20 Years. Here's How.

In the world of stock market investments, attention often gravitates towards large-cap companies, some of which possess a market value exceeding $1 trillion. The S&P 500 index is a popular choice for investors seeking exposure to the 500 largest U.S. companies. Over the last decade, exchange-traded funds (ETFs) tracking the S&P 500, such as the Vanguard S&P 500 ETF, have yielded an annualized return of roughly 15.3%.

However, some may argue that small-cap stocks, which represent younger, riskier yet potentially higher-growth companies, could soon capture the spotlight.

Vanguard's recent research predicts that U.S. small-cap stocks will outperform U.S. large-cap stocks in the years ahead, potentially by as much as 2.6% annually. One of the most accessible ways to gain exposure to small-cap stocks is through the iShares Russell 2000 ETF (IWM), which encompasses nearly 2,000 small-cap companies that may evolve into the large-cap firms of tomorrow.

While IWM has not consistently outperformed the S&P 500 over the past decade, delivering annualized returns of 9.75% compared to the S&P 500's 15.3%, it has been more modestly successful in the recent past. During the last five years, IWM has generated returns of 6.22%, and over the past three years, it has surged ahead with an annualized return of approximately 17.6%.

Assuming Vanguard's forecast holds true, the modest growth of IWM could persist for the next two decades. Now, let's consider three potential average annual returns for IWM over the subsequent 20 years and calculate the growth of a $100 monthly investment held for this period:

1. If IWM generates an annualized return of 15.3%, similar to the S&P 500, a $100 monthly investment would grow to approximately $167,690 after 20 years. This estimate, however, is not guaranteed, as IWM's actual returns could be lower.

2. If IWM achieves an annualized return of 9.75%, the $100 monthly investment would amount to around $101,000 after 20 years. Again, this outcome is uncertain and depends on the actual performance of the ETF.

3. If IWM experiences an annualized return of 17.6%, as it has over the past three years, the $100 monthly investment would accumulate to about $196,000 after 20 years. This is the highest estimate and, like the other projections, is based on assumptions that may not materialize.

In conclusion, even a modest monthly investment of $100 in a small-cap ETF like IWM has the potential to grow into a substantial sum over the long term, thanks to the power of compound growth. However, it is crucial to remember that these returns are speculative and not guaranteed. The actual performance of IWM may differ from these projections, but they serve as a valuable illustration of how small amounts of money, when invested wisely and left to grow, can accumulate into significant wealth.