How ETF growth works
An exchange-traded fund (ETF) holds a basket of investments, such as all 500 companies in the S&P 500, and trades like a single stock. Its value grows in two ways. The underlying companies rise in value, and the dividends they pay get reinvested. Then compounding takes over: each year's growth earns growth of its own.
What return should I assume?
The quick-pick buttons use the actual average yearly price return of popular ETFs over the last 10 years, calculated from our stored history (dividends not included). Over long periods the US stock market has averaged roughly 10% a year before inflation. Some decades were much better than that, and some were much worse. Many planners use 6–8% to stay on the conservative side.
Why the expense ratio matters
The expense ratio is the yearly fee a fund charges, taken as a percentage of your balance. 0.03% (VOO, VTI) and 1% sound almost the same, but over 30 years a 1% fee can take more than 20% of your final balance. Set the fee to 1% and watch the gold "zero fees" line pull away.
- Dollar-cost averaging: investing a fixed amount every month smooths out market swings.
- Accounts: holding ETFs in a Roth IRA or 401(k) can let growth compound tax-free or tax-deferred.
- Diversify: a broad index ETF spreads your risk across hundreds or thousands of companies.