1 Magnificent Tech ETF That Could Turn $200 per Month Into $704,000 or More | The Motley Fool

Investing in exchange-traded funds (ETFs) is one of the most effective ways to generate wealth in the stock market with minimal effort.

ETFs can provide instant diversification because many contain hundreds of stocks within a single investment — saving you countless hours of research compared to buying individual stocks. Greater diversification can also limit your risk, adding more variety to your portfolio to protect against market volatility.

Industry-specific ETFs, in particular, can help supercharge your earnings. An ETF that tracks a particular market sector can make gaining exposure to that industry easier without all the research involved in investing in individual stocks.

If you’re looking to invest in the technology industry, one tech ETF could help you turn $200 per month into $704,000 or more. Here’s how.

Building a strong portfolio

The Vanguard Information Technology ETF (VGT -0.04%) is a powerhouse tech fund with a history of seriously outperforming the market.

This fund includes 321 stocks from various areas of the tech industry. The three largest holdings are Microsoft, Apple, and Nvidia, respectively. Collectively, those three stocks make up close to 47% of the entire fund.

While you could simply invest in Microsoft, Apple, and Nvidia individually, investing in an ETF creates greater diversification. When Nvidia eventually pulls back (because it can’t keep up this phenomenal run forever), having hundreds of other stocks in your portfolio can help cushion the blow.

This ETF also has a relatively low expense ratio of 0.10%, meaning you’ll pay $10 per year in fees for every $10,000 in your account. Considering many similar funds charge fees of around 1% or more, a lower expense ratio could potentially save you thousands of dollars over time.

Supercharging your savings

One of the primary advantages of investing in an industry-specific ETF is the potential for above-average returns — and this fund has outperformed the market in a big way.

Over the last 10 years, the Vanguard Information Technology ETF has earned an average rate of return of 20.35% per year. For comparison, the Vanguard S&P 500 ETF (which tracks the S&P 500 index) earned an average return of just 12.66% per year in that time.

However, at least some of these incredible returns may be due to Nvidia’s astounding performance this year, considering the stock makes up a significant portion of this fund’s composition. However, this ETF has still earned an average return of 13.25% per year since its inception in 2004, which is higher than the market’s historic average of around 10% per year.

It’s unclear exactly how this fund will perform going forward, as past performance doesn’t guarantee future returns. But if you were to invest $200 per month, here’s approximately how much you could accumulate over time depending on whether you’re earning 10%, 13%, or 20% average annual returns:

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

If you’re earning 13% average annual returns, investing consistently for around 30 years will add up to around $704,000. But if this fund manages to earn returns closer to its more recent 20% annual average, you could potentially earn far more over time.

Consider the risk factor before you buy

There are never any guarantees in the stock market, and this is especially true when it comes to tech investments. This industry tends to thrive when the market is surging, but it’s also generally hit hard during downturns.

Before you invest, be sure this is a risk you’re willing to take. Your investment may earn higher-than-average returns going forward, but it could also earn average or even below-average returns in some years. If the potential reward outweighs the risk for you, it could be a smart addition to your portfolio.

Keep in mind, too, that when investing in a fund like this, the rest of your portfolio should be well-diversified. Because this ETF only contains tech stocks, you’ll need a variety of stocks from other industries to properly limit your risk.

The Vanguard Information Technology ETF is a powerhouse fund with a history of earning above-average returns, and it has the potential to supercharge your earnings. However, it’s not without its risks. By considering your goals and risk tolerance, you can decide whether it’s the right fit for you.