Want $1 Million in Retirement? 3 Simple Index Funds to Buy and Hold for Decades

Investing in low-cost index funds such as the VUG, SCHD, and XIT can help Canadian investors retire with $1 million.

Aditya Raghunath

Aditya Raghunath joined the Motley Fool Canada team in 2019 and has close to seven years of experience in covering publicly-listed companies. With a post-graduate degree in finance, Aditya aims to educate and engage Canadians by writing extensively about growth, dividend, and value stocks. If you are considering investing in the stock market, he recommends reading The Intelligent Investor by Benjamin Graham before taking the plunge.

Published October 10, 2024 4:10 pm EDT

Investing in the stock market may be overwhelming for most new investors. Keep in mind that while there are over 8,000 publicly traded companies in the U.S. and Canada, only a handful are positioned to deliver inflation-beating returns over time.

However, Canadian investors with a long-term horizon can build generational wealth by increasing their exposure to quality low-cost index funds that offer diversification and lower portfolio risk.

Here’s how to invest in these simple index funds to retire with $1 million.

Income and growth financial chart — Source: Getty Images

Invest in the Vanguard Growth ETF

Canadians with a high-risk appetite can consider holding the Vanguard Growth ETF (NYSEMKT:VUG). The index fund tracks the CRSP US Large Cap Growth Index, which invests in 200 large-cap growth stocks south of the border.

The largest holdings of the ETF include Apple, Microsoft, Nvidia, Amazon, and Meta Platforms, which account for 45% of the fund. In fact, the tech sector accounts for 56% of the index fund, followed by consumer discretionary at 19% and industrials at 8%.

With over US$250 billion in assets under management, the VUG ETF has an expense ratio of just 0.04%. In the last 10 years, it has generated a compounded annual growth rate of 15.5%, while annual returns are lower at 11.5% if we expand the investment horizon to January 2004.

Invest in the SCHD ETF

Another popular ETF in the U.S. is the Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD). The SCHD ETF is a low-cost fund that can serve as part of your core portfolio or complement a diversified portfolio. It tracks an index focused on the quality and sustainability of dividends, making it attractive to income-seeking investors.

With US$62.5 billion in assets under management, the SCHD ETF has an expense ratio of 0.06%. The fund’s top five holdings include Home Depot, BlackRock, Cisco, Verizon, and Pfizer, which collectively account for over a fifth of the total portfolio.

The SCHD ETF has delivered a compounded annual growth rate of 11.7% in the last 10 years.

Invest in the XIT ETF

The final ETF on the list is the iShares S&P/TSX Capped Information Tech Index ETF (TSX:XIT). While the VUG and SCHD provide you exposure to quality stocks in the U.S., the XIT focuses on Canada’s largest tech stocks.

In the last 10 years, the XIT ETF has returned more than 19% in average annual returns, which is staggering. With $662 million in net assets, the XIT ETF has an expense ratio of 0.60%, while its management fee is lower at 0.55%.

The fund’s top holdings include Shopify, Constellation Software, and CGI Inc., which account for almost 70% of the total index.

Compared to the VUG and the SCHD, the Canadian tech ETF is highly concentrated and can complement other investments on the list.

The Foolish takeaway

If you had invested $13,000 annually in each of these three funds in the last 10 years, your portfolio would be worth more than $1 million today after adjusting for dividend reinvestments. Investors should look to invest regularly in diversified index funds and build long-term wealth over time.