In 1975, John Bogle founded The Vanguard Group with a mission to simplify stock market investing.
The firm offered low-cost index funds, which championed a passive investment approach that tracks the market rather than trying to beat it.
Bogle’s indexing philosophy emphasises long-term investing, diversification, and keeping costs low. Most Foolish investors are down with all that, even if they prefer to pick individual stocks (like myself).
He once said: “The two greatest enemies of the equity fund investor are expenses and emotions.” Passive investing aims to eliminate high costs and remove emotions from the equation.
Here, I’ll look at an exchange-traded fund (ETF) that may be the simplest way to target a seven-figure portfolio.
Tracking the Footsie
Don’t look for the needle in the haystack. Just buy the haystack!
John Bogle
I’m talking about the Vanguard FTSE 100 UCITS ETF (LSE: VUKE). As the name indicates, it seeks to track the performance of the FTSE 100 index, which is comprised of large-cap stocks listed in the UK.
It therefore invests in all constituents of the Footsie in the same proportion. So, as of 30 April, the top five holdings were:
| Weighting (%) | |
| Shell | 9.1% |
| AstraZeneca | 8.7% |
| HSBC | 6.5% |
| Unilever | 5.0% |
| BP | 4.2% |
All of these blue-chip firms are well-established, profitable, and dish out regular dividends.
The ETF’s ongoing charge is just 0.09%.
Dividends are important
The FTSE 100 has risen 10.35% since the beginning of February and has been hitting record highs lately.
Still, many investors look at the historical share price returns of the FTSE 100 and are disappointed. And it has admittedly underperformed most other large indexes over the past 20 years or so.
However, such a view doesn’t take dividends into account (i.e., the total return). They don’t show up on most charts, yet they’re a crucial part of the overall picture.
The FTSE 100’s average yield is currently around 3.9%. That’s almost treble that offered by the S&P 500 (the main US index).
Over long periods, reinvested dividends can substantially boost returns. For example, the FTSE 100 has turned £1,000 invested in 1984 (when it was formed) into more than £22,000, with dividends reinvested.
That’s around 8% a year on average, which surpasses the returns typically seen from cash or bonds.
Now, this Vanguard ETF hasn’t been about since 1984. But from its inception in 2019, the version that reinvests dividends back into the fund (called accumulation) has turned every £10,000 invested into nearly £14,000.
Getting to a million
For our purposes, let’s assume that the FTSE 100 continues to return around 8% a year on average with dividends reinvested. Also, assume that I manage to invest £475 a month into this ETF.
In this scenario, my regular monthly investments would compound into £1m in just under 35 years. Incredible!
I should state that we don’t know what average returns the FTSE 100 will produce in future. It could be more or less. And dividends aren’t guaranteed, though investing in the whole index dramatically reduces this risk.
Plus, I haven’t factored in any platform fees here, while inflation will reduce future spending power.
Nevertheless, I expect FTSE 100 firms to be paying out dividends and creating value long into the future. So I reckon this ETF is a hassle-free way to consider aiming for a million pounds.
