One beautiful index fund could turn $375 per month into $953,800

By | March 15, 2024

The Nasdaq Composite recently hit an all-time high for the first time since entering a bear market in late 2021. That means the tech-heavy index is officially back in bull market territory, a milestone typically followed by significant gains in the stock market.

Especially the ‘Magnificent Seven’ Nvidia, MetaplatformsAnd Amazon, were instrumental in pushing the Nasdaq to a new all-time high, and all seven were able to perform well during the new bull market. However, instead of buying each stock individually, investors might consider buying an index fund that tracks the entire Nasdaq, such as the Fidelity Nasdaq Composite ETF (NASDAQ: ONEQ).

Doing this reduces risk by spreading money across more stocks, which has historically been a good investment strategy. This ETF would have turned $375 per month into $953,800 over the past thirty years.

The Fidelity Nasdaq Composite ETF offers major exposure to technology stocks

This ETF is a growth-oriented index fund that invests in more than 1,000 stocks, mainly large caps. Its components cover all eleven market sectors, but its distribution is heavily focused on the information technology (49%), communications services (14%) and consumer durables (14%) sectors.

Notably, the Magnificent Seven stocks are the seven largest holdings in the Fidelity Nasdaq Composite ETF, accounting for about half of the index fund by weight. But these aren’t the only heavily weighted stocks: the ten largest holdings are listed below.

  1. Microsoft: 11.8%

  2. Apple: 10.8%

  3. Nvidia: 7.5%

  4. Amazon: 7.1%

  5. Alphabet: 6.2%

  6. Metaplatforms: 4.2%

  7. Tesla: 2.5%

  8. Broadcom: 2.3%

  9. Costco Wholesale: 1.3%

  10. Advanced micro devices: 1.2%

I mentioned that the Fidelity Nasdaq Composite ETF is less risky than buying the Magnificent Seven shares directly because it offers greater diversity. However, that does not mean that the index fund is a low-risk investment.

As shown above, the ten largest holdings represent approximately 55% of the weighted exposure. This concentration has made the index fund a very volatile investment in the past. For example, the biggest drop in the last three years was 36%, but the biggest drop was in the more diversified S&P500 (SNPINDEX: ^GSPC) was only 25%. Investors should expect similar volatility in the future.

The Fidelity Nasdaq Composite ETF has been a rewarding long-term investment

Despite the volatility, this ETF has been a phenomenal investment over the past thirty years. The index fund achieved a return of 1,930% during that period, which equates to an annual return of 10.55%.

Several secular trends have contributed to that explosive growth, including e-commerce, cloud computing and mobile phones. More recently, artificial intelligence (AI) has been a key growth driver and promises to remain a powerful tailwind for the foreseeable future.

Going forward, investors can reasonably expect an average annual return of approximately 10.55% in the Fidelity Nasdaq Composite ETF. I say that because the performance of the past thirty years spans enough different market conditions—from economic booms to recessions—to provide a sensible barometer of future results. At that rate, the $375 invested monthly in the index fund would be worth $79,200 in ten years, $305,900 in two decades, and $953,800 in three decades.

Of course, some investors may not have $375 per month, while others may prefer to save more. To that end, the chart below illustrates how the different monthly contribution amounts would grow over time.

Holding period

$250 per month

$300 per month

$450 per month

10 years

$52,800

$63,400

$95,100

20 years

$203,900

$244,700

$367,100

30 years

$635,900

$763,100

$1.1 million

Data source: Investor.gov compound interest calculator. The above figures assume an annual return of 10.55%. Dollar amounts are rounded down to the next $100.

The Fidelity Nasdaq Composite ETF has a below-average expense ratio of 0.21%, so the annual fee for a $5,000 portfolio would be $10.50. Ultimately, you’d be hard-pressed to find a cheaper index fund with a better track record, but investors should get comfortable with extreme volatility before buying stocks.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon, Nvidia and Tesla. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Forget the ‘Magnificent Seven’ Stocks: 1 Magnificent Index Fund Can Turn $375 a Month into $953,800 was originally published by The Motley Fool

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